Technology

Annual Inflation Falls to 3.5-Year Low, Offering Relief to the Economy

Pakistan inflation rate has dropped to its lowest level in 3.5 years, settling at 6.9% in September. This significant decline, driven by lower non-perishable food prices and a favorable base effect, creates space for the central bank to consider multiple interest rate cuts aimed at stimulating the economy. The Pakistan Bureau of Statistics (PBS) released this data on Tuesday, marking a positive shift in the country’s economic landscape.

For the first time in recent years, all three key inflation indicators—annual inflation rate, core inflation rate, and average inflation rate—dipped into single digits. This decline reflects easing inflationary pressures, giving policymakers the opportunity to adjust monetary policies to combat persistent poverty and unemployment.

However, there are concerns regarding the method used to monitor electricity prices. The current approach only accounts for the consumption of 50 units per month, which represents a mere 4% of total residential consumers. For lower-income households, electricity bills are consuming as much as 30% of their monthly income, raising questions about the accuracy of the inflation rate data.

The PBS reported that September’s inflation rate of 6.9% is a notable reduction compared to the previous year’s figure. This is the slowest rate since January 2021, when inflation stood at 5.7%. The decline surpassed market expectations, with many forecasting inflation to remain around 8%.

Several factors contributed to the lower inflation rate. A significant base effect from last year’s 31.4% inflation played a role, along with a reduction in the prices of essential items such as wheat, flour, cooking oil, and petroleum products. These price drops were driven by both domestic and international market trends. For instance, the Punjab government’s decision not to purchase wheat from farmers caused a drop in wheat prices, while declining global crude oil prices allowed the government to reduce the costs of petrol and diesel.

In addition, the federal and provincial governments have signed a National Fiscal Pact under the International Monetary Fund (IMF) agreement. This pact includes commitments to refrain from setting agriculture support prices and purchasing commodities, a decision that is expected to influence upcoming sugarcane prices.

Despite these positive trends, challenges remain. The government increased electricity prices for residential consumers by 14% to 51% as part of the IMF program. However, the PBS’s methodology for measuring these increases has faced criticism, as it focuses only on consumers using 50 units or less, excluding the majority of consumers who are experiencing much higher electricity costs. This has led to questions about the reliability of the reported inflation rate.

The prices of other essential items, such as clothing, footwear, housing, healthcare, and education, have seen double-digit increases. These goods were affected by new taxes introduced in the budget, including sales tax and a 2.5% withholding tax on supplies.

Given the current inflation figures, the State Bank of Pakistan (SBP) has ample room to reduce interest rates. With the current interest rate at 17.5%, a cut of at least 3% to 4% seems plausible in the upcoming Monetary Policy Committee meeting. The government has set an inflation target of 12% for the fiscal year, although the IMF predicts it will end closer to 9.5%.

In urban areas, the annual inflation rate dropped to 9.3%, while in rural areas, it plummeted to 3.6%. Food inflation in cities fell to just 1.7%, and rural areas even experienced a slight deflation of 1% in food prices. However, perishable food items like onions, fresh vegetables, and fruits saw a 20% increase in price compared to last year.

Non-food inflation dropped due to substantial reductions in the prices of staples like wheat (39% decrease), wheat flour (37% decrease), sugar (15% decrease), and cooking oil (12% decrease). Core inflation, which excludes food and energy prices, also eased to 9.3% in urban areas and 12.1% in rural areas.

Despite the overall decline in inflation, some costs, like gas charges, remain high, with a year-on-year increase of 319%, and motor vehicle taxes have risen by 169%. Nevertheless, the average inflation rate for the first quarter of the fiscal year stands at 9.2%, well below the government’s annual target of 12%.

In conclusion, while the drop in inflation offers some economic relief, the burden on lower-income households due to high electricity prices and taxation on essential goods persists. The coming months will be critical as the government and central bank navigate these mixed signals to steer the economy towards stability.

Read more: https://jininews.pk/

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Ahsan Khan

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