Pakistan’s annual inflation rate dropped to a 3.5-year low of 6.9%, driven by a favorable base effect and lower non-perishable food prices, according to data released on Tuesday. This decline provides significant room for the central bank to implement multiple interest rate cuts to stimulate the economy.
In a rare occurrence, all three key indicatorsannual inflation rate, core inflation rate, and average inflation ratefell to single digits, signalling a substantial easing of underlying inflationary pressures.
This will give room to the policymakers to change the course of monetary policies to reenergise the economy amid high poverty and unemployment in Pakistan.
However, questions have also been raised over the methodology used to monitor electricity prices, which captures monthly consumption of only 50 units or 4% of total residential consumers of Pakistan. For the lower income groups, the electricity bill is now eating up to 30% of their monthly incomes.
The Pakistan Bureau of Statistics (PBS) reported on Tuesday that the inflation rate decelerated to 6.9% in September compared with the same month of the last year. It was the slowest pace since January 2021 when the reading was 5.7%.
The monthly inflation reading also beat the expectations of the market and the finance ministry that had given the lowest inflation forecast of 8% for the last month. A key reason behind the low reading despite constant increase in the prices was the 31.4% inflation rate in September last year, which provided a favourable base impact.
The people also got some relief due to reduction in the prices of wheat, flour, cooking oil and petroleum products on the back of downward movements in the domestic and international market prices.
The Punjab government’s decision not to buy wheat from the farmers crashed the commodity prices. The international crude oil prices are also remaining on the downward trajectory, which is helping the government to reduce the domestic prices of petrol and diesel.
The federal and the four provincial governments have also signed a National Fiscal Pact under the International Monetary Fund (IMF) umbrella. They have committed to refraining from determining the agriculture support prices and abandoning the practice of purchasing commodities.
The decision will also have implications for the upcoming sugarcane prices.
The finance ministry had proposed to Prime Minister Shehbaz Sharif to increase the petroleum levy by Rs5 per litre to Rs65 during the last price review to absorb some of the reduction to meet the IMF condition on petroleum levy collection. However, the prime minister did not agree while the finance minister remained neutral on the issue.
Under the IMF programme, the government has increased the electricity prices in the range of 14 to 51% for the residential consumers. But the PBS is implementing a faulty methodology where it takes into account the electricity price variation to the extent of 50 units per month consumption.
Out of 28.8 million residential consumers, only 1.3 million or 4% of the total consumers fall in the category of 50 units consumption. The PBS is not taking in the rest of 96% or 27.5 million consumers who are bracing for an unbearable electricity price hike. This faulty methodology brings into question the credibility of the 6.9% inflation rate.
Likewise, there was a double-digit increase in the prices of clothing, footwear, perishable food items, house rents, water, gas, health services and education. These goods were affected by heavy taxation in the budget. There was a significant increase in the prices of those items that have either been affected by the imposition of the sales tax or a 2.5% withholding tax on their supplies.
The 6.9% inflation rate warrants a further steep cut in the interest rates by the State bank of Pakistan (SBP) in the next monetary policy review. The existing interest rate of 17.5% is about 10.6% higher than the prevailing inflation rate.
The fresh inflation figures suggest that the central bank has room to reduce the interest rates by at least 3% to 4% during the upcoming Monetary Policy Committee. For the new fiscal year, the government has set the inflation target at 12% but the IMF sees the indicator at 9.5% by the end of the fiscal year.
The annual inflation rate in urban areas also slipped to single digit of 9.3% while significantly decelerated to 3.6% in villages last month, according to the national data collecting agency. The PBS data showed that food inflation substantially decelerated in cities to 1.7%. There was 1% deflation in food prices in the rural areas.
However, the prices of perishable food items increased over 20% last month on an annual basis because of a surge in the prices of onion, fresh vegetables and fruits etc. The non-food inflation rate dropped due to a 39% reduction in prices of wheat, 37% wheat flour, 15% of sugar and 12% of cooking oil.
The core inflation, which is calculated after excluding the energy and food items, have also slipped into single digit of 9.3% in cities, indicating ease of underlying inflationary pressures. It also slowed down to 12.1% in rural areas. The average core inflation is now almost 8% lower than the policy rate.
However, the gas charges remained high by 319% higher than the previous year and there was an increase of 169% in motor vehicle tax.
The average inflation rate during the first three months also slipped to single digit and recorded at 9.2%, which was far below the official annual target of 12%. But in urban areas the average inflation was 11.9%.
