Public sensitivity to inflation

The Consumer Price Index (CPI) as calculated by the Pakistan Bureau of Statistics (PBS) for May 2026 was 11.7 percent, 0.8 percent higher than the April 2026 rate of 10.9 percent, and 0.6 percent higher than June – a May rise economists’ would unhesitatingly attribute to the Middle East crisis that generated severe supply disruptions of oil, jet fuel, fertilisers and minerals including helium used in the manufacture of computer chips.

Pakistan’s data credibility in general and inflation in particular was challenged in 2024 when the International Monetary Fund (IMF), at the time of approval of the ongoing Extended Fund Facility programme, highlighted “important shortcomings (in) the source data available for sectors accounting for around a third of Gross Domestic Product, while there are issues with the granularity and reliability of the Government Finance Statistics (GFS)….the government will prioritize and address these weaknesses supported by technical assistance (TA) from the Fund on GFS and a new Producer Price Index (PPI).”

The PPI is a critical measure defined as computing the average change over time in the selling price of goods and services that are produced domestically – and the price used is determined at factory-gate and excludes transport charges and taxes. The Fund suggested further revisions in the proposed PPI methodology by the Pakistan Bureau of Statistics (PBS) to make it more credible and authentic, which led to the extension of the scheduled end of the TA from end June to October this year.

A PBS official informed Business Recorder that an upgraded PPI would enable the government to identify the role of the middleman and hoarders in the event of discrepancies or unusual increase or decrease in the cost of production and the end consumer price. He further contended that the new PPI would enable detection of the role of the middleman by monitoring trade and transport margins – given that middlemen play a very critical role in supplying farm output to the market in Pakistan. Disturbingly the official acknowledged that so far very little work, if any, has been undertaken for the agriculture sector due to the fact that subsequent to the 18th amendment agriculture is a provincial subject and the provinces’ crop reporting services lack any capacity to meet PPI requirements.

This admission implies that the weightage of 34.58 percent given to food and non-alcoholic beverages in CPI (with 29.60 percent for perishables) in calculating the CPI and the PPI calculation is likely to be revised, subject to capacity building in the provinces crop reporting services. And, disturbingly, the chokehold of aarthis (middlemen) on the food supply chain, estimated at 80 percent of the total farmed output, and on pricing, will remain unless the provinces’ crop reporting services undergo massive capacity building.

The next highest weightage is given to housing, water, electricity, gas and fuels, at 23.63 percent. Apart from housing which one would assume is perhaps less than 1.5 percentage of the total, all other items are subject to the IMF condition of ensuring full cost recovery that the State Bank of Pakistan (SBP) euphemistically refers to as “administrative measures” – defined as raising utility charges as costs rise irrespective of whether they are attributable to higher fuel costs (imports) or inefficiencies. These measures pertaining to the energy sector are geared towards reducing the circular debt that reflects appalling sectoral performance necessitating subsidies at the taxpayers’ expense and/or borrowing from the market (with 1.25 trillion rupees borrowed this year whose interest payments were to be passed onto the consumers). Thus with over 58 percent of the CPI weightage placed on items operating outside the SBP areas of influence and major input costs linked to full cost recovery dependent on not only international prices but also the rupee dollar parity accounts for energy prices in Pakistan higher than in other regional competitors. It is therefore inexplicable as to why IMF continues to place the onus of reducing inflation on SBP through policy rate manipulation. And, if one takes account of the fact that the bulk of domestic commercial bank borrowing is largely secured by the government, to the tune of around 75 percent, which it then proceeds to spend on current expenditure – a policy that is highly inflationary in itself the reliance on policy rate to control inflation is all the more inexplicable.

The CPI jump from January to February, of 1.92 percent, pre-dates the Middle East conflict and relates to the upward adjustments agreed under the ongoing IMF programme; notably, adjustments in administered electricity and gas prices, increase in transport costs through higher petroleum levy (a major source of government revenue that is not shared with the provinces). Interestingly, all Monetary Policy Statements (MPS) from last year to the present have not deviated from their medium-term projection of 5 to 7 percent, which compels one to regard this projection as a target dictated by the Fund but with risks highlighted. The 26 January MPS states that: “On balance, the Committee projects inflation to stabilize within the target range of 5 – 7 percent in FY26 and FY27, after temporarily exceeding the upper bound for a few months during this calendar year.” From March to April the CPI jumped by 3.6 percent that prompted the MPC to raise the policy rate by 100 basis points though on 27 April MPS again “assessed that the current supply shock may push inflation to double digits in the coming months before it starts to ease subsequently. However, inflation is expected to stay above the upper bound of the target range of 5 – 7 percent for most of FY27.”

To conclude, governments are extremely sensitive to inflation for political reasons and the way forward should be to calculate accurate data that resonates with the public and enables the Executive to take informed decisions both at the fiscal, monetary and sectoral levels.

Copyright Business Recorder, 2026