Zafar Iqbal

Inflation in Pakistan has recently dropped to its lowest point in nine years, with the headline rate hitting 1.5% in February 2025. Projections indicate that it may even fall below 1% in March. This sharp decline in inflation, while striking, is not translating into immediate relief for consumers, as the erosion of purchasing power remains a significant concern. It is clear that, although inflation is decreasing, the effects on everyday life are expected to linger far longer.

The decline in inflation numbers is indeed dramatic. The Consumer Price Index (CPI), which peaked at an eye-watering 38% in May 2023, has now plummeted to just 1.5% in early 2025. While the Shahbaz Sharif government may seek credit for achieving this multi-year low in inflation, it must also take responsibility for presiding over Pakistan’s worst inflation crisis in history. The soaring inflation of the past was largely driven by poor macroeconomic policies and the global commodity Supercycle, which saw prices spike worldwide. In contrast, the current downward trend can largely be attributed to better economic management under the caretaker government and a global decline in commodity prices.

One significant factor contributing to this decline is the base effect, which is expected to normalize by next month. Inflation is anticipated to bottom out below 1% in March, after which it may start to rise again, although it is expected to stay within single digits. However, the broader question remains: How long will it take for the erosion of purchasing power to be repaired, and how quickly will the benefits of falling inflation translate into tangible improvements for the average consumer?

In February 2025, inflation figures were even lower than expected. Analysts had predicted that CPI would hover around 2%, but the index instead fell by 0.8% on a month-on-month basis. This decline was primarily driven by a sharp drop in food prices, with food inflation decreasing by 4.5% year-on-year and 2.65% month-on-month.

Among the most significant declines were in perishable food items, which saw a drastic fall in prices. For instance, tomatoes saw a 56.8% month-on-month price drop, onions fell by 31.5%, potatoes were down 20.1%, and fresh vegetables dropped by 16.7%. Eggs, too, saw a 14.2% reduction in price. These food items, while volatile, reflect a major aspect of the inflation picture. It is important to note that such steep price drops may not last long, as they are highly sensitive to seasonal changes, market conditions, and international supply chains.

On the other hand, non-perishable food items such as wheat and wheat flour saw a more sustained price decline, dropping by 34% to 36% compared to the previous year. This was largely due to the absence of wheat support prices, an increase in imports, and the decline in international wheat prices. While this has helped temper food inflation, it has come at a cost to the agricultural sector, as the reduction in wheat prices has further harmed the farm economy, which is already under stress. This economic hardship in rural areas continues to contribute to slower overall economic growth and limited job creation in the agriculture sector.

Beyond food, there were notable declines in energy prices as well, primarily due to lower international commodity prices and a stable currency. The housing and utility sub-index fell by 0.3% year-on-year, with electricity prices dropping by 16.6% and motor fuel prices falling by 5.1%. These reductions in energy prices have also played a role in driving the overall inflationary trend downward.

While headline inflation is falling, core inflation (which excludes food and energy) remains stubbornly high. In May 2023, core inflation peaked at 22.7%, but by February 2025, it had dropped to 8.85%. Interestingly, this figure remained unchanged from the previous month, suggesting that core inflation may have hit a plateau. This is an important signal, as it indicates that despite the drop in food and energy prices, inflationary pressures in other sectors are still quite strong, especially in the services and non-essential goods sectors.

For many, especially those in the middle class, inflationary pressures remain persistent. Expenses on essential items such as healthcare, which saw an inflation rate of 15.5%, clothing and footwear (15.2%), and miscellaneous items (11.1%) are still rising at double-digit rates. These increases continue to strain household budgets, making it difficult for consumers to feel the effects of the broader inflation decline. In rural areas, the situation is even more dire, with education inflation standing at a staggering 24.5% in February, which only compounds the financial strain on families already struggling with lower incomes.

Despite the overall decline in inflation, not all regions and sectors are benefiting equally. Urban areas, especially those where economic activity is stronger, are still witnessing persistent inflation in certain high-demand sectors. A case in point is the accommodation services sector, which saw a sharp 5% increase in prices in just one month during the first quarter of FY25. This indicates that inflation is still “sticky” in some areas, particularly in services and urban-centric sectors where demand continues to outstrip supply.

Furthermore, inflation is expected to remain elevated in certain high-demand areas, particularly in construction and housing, as the government has cut interest rates by 10% over the past six months. These policy measures are likely to spur demand in various sectors, which could lead to price increases, especially in services and goods where demand is already high.

Looking ahead, with 8MFY25 inflation standing at 5.9% and subdued rural demand, there is some room for further monetary easing. However, the State Bank of Pakistan (SBP) must tread cautiously, as the effects of previous policy changes are still being felt in the economy. While lower interest rates have spurred demand in some sectors, there are signs that consumer behavior in urban areas may be shifting, which could lead to a resurgence in inflationary pressures. The SBP needs to carefully balance these factors to prevent a reemergence of inflation.

In conclusion, while the sharp decline in Pakistan’s inflation rate is a positive development, the broader picture remains complex. Consumers, particularly in urban and middle-class households, continue to feel the strain of high costs in essential sectors like healthcare, education, and housing. Moreover, the country’s agricultural sector is facing challenges as food prices decline, leading to a deterioration of the farm economy, which weighs heavily on overall economic growth and employment generation.

While inflation is expected to stay low in the near term, the persistence of core inflation and sectoral disparities indicate that the recovery is far from complete. Policymakers must focus on fostering long-term economic stability, addressing the underlying challenges in key sectors, and ensuring that the benefits of falling inflation are felt by all segments of society. Only then can Pakistan achieve a sustainable recovery that benefits both consumers and the economy as a whole.