Inflation soaring

EDITORIAL: The Pakistan Bureau of Statistics (PBS) calculated the Consumer Price Index (CPI) for August at 11.1 percent – 1.9 percent higher than the 9.2 percent estimated in July. It is relevant to note that the August rate is precisely the same as the June rate while it is 0.6 percent lower than the May CPI and 0.2 percent higher than the April calculation. When compared to July-August last year the rise in CPI in the first two months of current fiscal year is stark: 3.56 percent in 2025 against 10.17 percent in 2026.

The major factor responsible for these high CPI rates is, without doubt, the ongoing Middle East crisis, which continues to choke the supply of petroleum and products (including diesel and aviation fuel), fertilizers, and helium to the international market; however, imports are being delivered to the Gulf countries by air, which is more expensive than shipping.

Data uploaded by the PBS indicates that the Wholesale Price Index (WPI) rose from negative 0.74 percent July-August 2025 (negative indicative of the overall prices traded in bulk at the wholesale level declining or in economic terms deflation in the wholesale market) while the CPI for July and August this year was positive. The four reasons for this discrepancy need to be looked at urgently by the country’s economic team leaders and appropriate mitigating measures put in place:

(i) inclusion of the services sector; for example, doctors, hospital, education fees, which witness periodic raise are included in the CPI but not in the WPI; (ii) middlemen and in Pakistan the middlemen are operational in all sectors, including agriculture where aarthis with long-standing relations with farmers secure the seasonal crop and sell it at a price that allows for windfall profits; (iii) change in the wholesale price takes time to travel down the supply chain; however, in Pakistan the upgrade in regulated prices; for example, petroleum and products, is implemented immediately while any downward movement is resisted; and (iv) WPI focuses on industrial inputs like raw materials and fuel, which have been rising since 2019 due to the implementation of International Monetary Fund conditions, whereas CPI consists of consumer prices.

Pakistan has a large informal sector, estimated at almost 50 percent of the legal economy, where prices are charged based on the trader’s perception of the client’s ability to pay.

This accounts for a higher price charged by a street vendor if one is in a fancy expensive vehicle while the price may be significantly lower if someone on bicycle is the client. While successive administrations have been urging the Federal Board of Revenue (FBR) to bring the informal sector into the tax net, including small traders, yet this continues to be vigorously opposed by those operating within the informal sector.

In addition, many chartered accountants operating in the private sector have cautioned the FBR that the recently launched Tax Asaan mobile and web application—which was designed amidst much fanfare to help taxpayers file returns, register, and pay taxes—contains features that could be abused. A better option would be for the FBR to implement structural tax reforms and shift its heavy reliance away from indirect taxes.

While budget documents estimate indirect taxes at 50 percent, the actual figure is likely higher; this is because direct taxes include withholding taxes on sales, which are inherently indirect and account for an estimated 70 percent of all direct tax collections.

It is, therefore, critical for the government to look at components of its revenue (which must include the petroleum levy budgeted at a whopping 1.6 trillion rupees in the current year) to ease inflationary pressure on the vulnerable and lower- to middle-income earners, given that the percentage of people living below the poverty line in Pakistan, as determined by the World Bank, has reached a disturbingly high 42.4 percent.

Copyright Business Recorder, 2026