The double-digit inflation

The month of June 2026 has witnessed a rate of inflation in the Consumer Price Index (CPI) of 11.1 percent on a year-to-year basis. This was preceded in the previous two months of April and May also by double-digit inflation of 10.9 percent and 11.7 percent, respectively.

The CPI has, in fact, been showing a rising rate of inflation since July 2025, when it stood at 4.1 percent. By February 2026, it had approached 7.0 percent. Thereafter, the Middle East war and the disruption of oil supplies through the Strait of Hormuz have implied a big increase in the price of petroleum products globally, and in Pakistan as well. Consequently, the rate of inflation has surged globally and in Pakistan from 7 percent in February 2026 to 11.1 percent by June 2026.

The upsurge in the rate of inflation in the last quarter of 2025-26 has implied an average rate of increase in the CPI of 7.1 percent in 2025-26. This is significantly higher than the rate of inflation in 2024-25 of 4.5 percent.

The core rate of inflation, corresponding to the non-food non-energy inflation, has reached 8.7 percent in 2025-26. The trimmed rate of inflation has been even higher at 9.6 percent.

The SBP maintains a relationship between the policy interest rate and the core rate of inflation. As such, the rise in the core rate of inflation will limit the ability of the Monetary Policy Committee to bring down the policy rate in its forthcoming committee meeting.

A fundamental question is whether the significant upsurge in the rate of inflation is due solely to rising oil and gas prices after the Middle East war or are other factors in Pakistan have also contributed to the double-digit inflation?

The answer is that directly the increases in petrol and gas prices have had a very broad-based impact on the rate of inflation, due to the rise generally in transport costs and in utility bills. However, what has not been focused on is the unexpected upsurge in food prices, due primarily to the quantum jump in the price of wheat by almost 65 percent and that of wheat flour by over 55 percent.

Why has there been such a big increase in wheat prices? According to the Pakistan Economic Survey, a positive outcome was expected in 2025-26, with wheat acreage and production rising by 4.3 percent and 4.4 percent, respectively.

However, the latest estimates by the USDA of wheat crop output in Pakistan in 2026 reveal that in the case of Pakistan there has been a big drop from 31.81 million tons in 2024-25 to 28.40 million tons in 2025-26. This implies a large fall of 10.7 percent in output. It explains the quantum jump in wheat and wheat flour prices. It also appears to be consequence of a withdrawal of a policy of a minimum procurement price on wheat sales to farmers.

The Sensitive Price Index (SPI) is a key indicator of the level of cost-of-living for the low and middle income quintiles. It includes the prices of 51 basic goods and services.

The quantum jump in the prices of wheat and wheat flour has led to a higher rate of inflation in the SPI of 13.5 percent in the case of the lower two income quintiles. This compares with the inflation in the top quintile of 10.1 percent.

This implies that in the presence of rising unemployment due to relatively low GDP growth and higher rise in the cost of living of the lower income households, the majority of the population is likely to have become worse off in 2025-26. This is unfortunately the trend that has been observed in the last five years.

A comparison can be made of the rate of inflation in Pakistan with that in other South Asian countries like India and Bangladesh. In June 2026, reflecting the impact of the Middle East war, the rate of inflation in India still remained low at 4.4 percent, while it was significantly higher in Bangladesh at 9.2 percent. However, these rates are still low in comparison to the rate of inflation in Pakistan in June of 11.1 percent. A major part of the difference is likely to be big jump in the prices of food staple, wheat, etc., in Pakistan.

A useful analysis is also to determine the prices of petrol and HSD oil in the three South Asian countries. It is significant that both India and Bangladesh had a lower prices in the second quarter of 2026, after the commencement of the Middle East war, of HSD diesel oil and significantly higher price of petrol. This pricing policy is likely to be better from the viewpoint to limiting the impact on the overall price level of the quantum jump internationally of prices of crude oil and petrol prices.

There is need also to highlight that currently the average price in US dollars per kwh of electricity for industrial consumers in India is 20 percent lower and in Bangladesh it is 34 percent lower than the tariff in Pakistan. Clearly, this has placed Pakistan at a big competitive disadvantage in exports.

We come to the outlook for inflation in Pakistan in 2026-27. This is expected to remain at the same average rate of 7 percent as in 2025-26, according to the IMF and the Annual Plan. However, the resumption of the war in the Middle East and the closure once again of the Strait of Hormuz do not portend well for international oil and gas prices. Consequently, if the conflict persists in 2026-27 then there is the likelihood that the Brent crude oil price could approach or even rise above the peak price of USD 114 per barrel in 2026. This will accelerate the rate of inflation in Pakistan. As such, the rate of inflation is likely to remain double-digit in 2026-27 and even approach 15 percent.

The emphasis in the policies to manage inflation ought to be to limit the surge in food prices as happened in 2025-26, especially of wheat and wheat flour. Otherwise, the combined effect of higher oil and food prices will worsen further the living standards of the majority of households in Pakistan.

The tragedy is that there has been no respite to the people of Pakistan since the COVID-19 in 2019-20 and the floods in 2022-23 and now with the war in the Middle East. Pakistan’s efforts to bring peace in the Middle East must, however, be recognized.

Copyright Business Recorder, 2026