Headline inflation clocked in at 5.8 percent in January, compared to 2.4 percent in the same month last year. Over 7MFY26, CPI averaged 5.2 percent versus 6.5 percent in the corresponding period last year. Overall inflation appears to be stabilizing, hovering around SBP’s medium-term target range of 5–7 percent.
Interestingly, the recent decline in inflation has been more pronounced in urban areas, while rural inflation has edged up from earlier lows. Urban inflation averaged 5.3 percent in 7MFY26, down from 7.8 percent in the same period last year.
In contrast, rural inflation so far this year stands at 5.1 percent—roughly in line with urban levels—but has increased from 4.6 percent in the corresponding period last year.
The month-on-month increase in headline inflation remained modest at 0.4 percent in January 2026. However, there is a divergence in price movements between rural and urban areas, with rural inflation rising by 0.6 percent MoM, while urban inflation increased by a relatively muted 0.2 percent.
Core inflation remains relatively sticky, standing at 7.6 percent in January and moving within a narrow 7–8 percent range over the past seven months.
In contrast, headline inflation oscillated between 0 and 6 percent over the same period. Another notable trend is that rural core inflation has consistently remained higher than urban core inflation over the past twelve months, although the gap has narrowed to 1.1 percentage points in January 2026 from 2.6 percentage points a year earlier.
The primary reason behind the subdued monthly increase in recent months—averaging just 0.1 percent over the past three months—has been softer food prices, particularly perishables, alongside relatively low energy prices due to weaker global commodity prices.
Perishable food inflation has remained low due to seasonal factors, as winter conditions extend shelf life and limit price spikes. Additionally, the closure of the Afghan border has resulted in an oversupply of food items in the domestic market that are typically exported to Afghanistan.
Food prices increased by just 0.1 percent MoM, with non-perishable items rising by 1.9 percent, while perishable items declined sharply by 13.4 percent. Price increases were observed in chicken (16.1 percent), wheat (10.2 percent), and wheat flour (4.8 percent), whereas significant declines were recorded in onions (28.5 percent), potatoes (28.1 percent), and fresh vegetables (16.6 percent).
The transportation index also declined by 1.3 percent MoM in January, while its year-on-year increase remained subdued at 2.8 percent. This largely reflects lower international oil prices, which have helped keep domestic petroleum prices in check despite higher levies imposed by the government.
Although oil prices briefly crossed $70 per barrel last week amid rising tensions involving Iran, they have since eased back to around $65. Lower oil prices continue to support a benign inflation outlook for Pakistan.
A similar pattern is evident across several other commodity prices, which remain depressed and are helping contain inflation domestically. This has been reinforced by subdued demand following significant erosion in purchasing power during FY22–FY24, as well as the impact of tight fiscal and monetary policies.
That said, risks remain tilted to the upside. A resurgence in global oil and commodity prices due to geopolitical tensions could reintroduce inflationary pressures.
Moreover, the cumulative impact of SBP’s aggressive rate cuts—amounting to 11.5 percentage points, bringing the policy rate down to 10.5 percent—is still transmitting into economic activity, as reflected in over 10 percent growth in large-scale manufacturing in November. SBP has also revised up its GDP growth forecast for FY25 by 50 basis points.
Inflation is therefore expected to edge higher in the coming months due to base effects, potentially hovering in the 7–9 percent range over the next three to four months. In this context, SBP’s decision to pause monetary easing in January appears prudent.