Inflation slowdown: relief or a temporary pause?

Inflation in Pakistan has plunged from 28.3 percent in January 2024 to 2.4 percent in January, 2025 year-on-year, presenting a dramatic shift from a record high of 38 percent in May 2023. This drop offers a respite to millions who have struggled to sustain their livelihoods with this high inflation rate. Is this relief a sustainable or a temporary pause before structural cracks re-emerge?

The State Bank of Pakistan’s (SBP’s) report, in its latest assessment, suggests this slowdown appears a fragile win, driven by short-term factors rather than deep structural reforms.

The inflation slowdown presents a complex story. The Consumer Price Index (CPI) basket, which tracks price changes, is primarily composed of food and non-food items. Food inflation, which spiked to 38.5 percent in August 2023, has now decreased to 1.8 percent percent.

Several factors explain this dramatic decline including favourable weather conditions, global decline in commodity prices, and government intervention in controlling prices of essential food items, particularly staples. In addition, the non-food component of inflation, particularly energy prices, a key contributor to the CPI basket, has also declined. A global decline in oil prices has contributed to lower energy prices, helping to ease the inflationary pressure.

Core inflation (Non-Food Non-Energy) has also declined, necessitating monetary easing. Between 2022 and mid of 2023, the SBP raised its policy rate to a record 22% - a very tight stance. This discouraged borrowing and cooled consumption, reducing inflation to 11.2 percent in May 2024 from 38.5 percent during May 2023.

Apart from the above short-term macroeconomic indicators, the IMF-led reforms under the USD 7 billion Extended Fund Facility (EFF), which was agreed upon in July 2024, also seem to have played a significant role in this slowdown.

One significant measure was returning to a market-determined exchange rate, which, after an initial depreciation in rupee, stabilised during the last quarter of 2023, reducing high import cost-induced inflationary pressure. Another significant reform was the aligning of energy tariffs with energy cost, minimising subsidies that had previously been draining fiscal space. These measures together allowed for better resource allocation and eased price pressures over time.

Most importantly, the key statistical factor at play is the base effect. Inflation is measured year-on-year, meaning current prices are compared to those in the same month during the previous year. The astronomical price hikes during the last two years, fuelled by global commodity prices hikes and local missteps, are creating an illusion of disinflation.

Therefore, even a modest increase in prices in 2024 can appear as a sharp disinflation in statistical terms. This does not imply that the prices are falling; rather, they are rising at a slower pace than an already elevated high baseline of 38 percent in 2023 and 11.3 percent in 2024.

Take, for instance, the striking decrease in inflation to 1.5 percent in February 2025, which reflects not only improved macroeconomic management but also a statistical quirk. Imagine a dozen eggs jumping from PKR 100 to PKR 200 last year; an increase to PKR 210 would now seem like a bargain by comparison.

So, is this relief or a temporary pause? If we turn to data and evidence, then it would be a temporary respite. The IMF’s push for fiscal consolidation and energy reforms has eased the inflationary pressures, alongside factors like oil prices and base effects. However, the analysts caution that this slowdown rests on shaky ground — external loans and decline in import costs, not real economic growth. For now, Pakistanis may breathe easier, but the spectre of inflation’s return looms large unless bold, homegrown reforms take root.

The government policies now will shape the future inflation trajectory. Take, for example, the global decline in oil prices. If the government passes the savings on to consumers by reducing domestic oil prices, it would deepen the deflationary momentum, offering businesses and households some relief. However, if it chooses to raise the petroleum levy — as recently announced - it may reverse the current deflationary momentum.

Moreover, the decline in food prices also poses future challenges. Lower profits may discourage farmers from cultivating certain crops, potentially reducing supply and causing a resurgence of cost-push inflation in future food prices. For example, as reported by the Food and Agriculture Organisation (FAO), wheat cultivation area is expected to shrink post government removal of support price since May 2024. Cotton production is also projected to fall to 5.2 million bales in 2024-25, from 7.5 million, jeopardizing textile exports.

In conclusion, without meaningful structural reforms, any relief from inflation will be fleeting. Not to forget the sobering part — analysts warn that inflation may rise again as the base-year effect fades.

Copyright Business Recorder, 2025