January 31, 2025 (MLN): Pakistan’s headline inflation for January 2025 is expected to fall to a remarkable 2.93% year-on-year (YoY), marking the lowest level in nine years. This would represent a sharp decline from 4.1% in December 2024 and a steep drop from the 28.3% inflation rate seen in January 2024. On a month-on-month (MoM) basis, inflation is projected to increase by 0.49% in January 2025, up from a 0.1% increase in December 2024, but significantly lower than the 1.8% rise in January 2024.
The expected YoY inflation for January 2025 brings the average inflation for the first seven months of FY25 to 6.7%, a substantial improvement from the 28.7% recorded during the same period in FY24. The primary driver behind this drastic reduction is the favorable base effect from the skyrocketing inflation of the previous year, even as inflation saw a slight uptick in January on a monthly basis.
One of the key contributing factors to this decline in inflation is the reduction in food prices, with food inflation expected to fall by more than 2% in January 2025. In particular, several staple items, including tomatoes, potatoes, eggs, onions, and pulses, have seen significant price reductions, with some commodities, such as tomatoes and potatoes, dropping by 21.8% and 21.37% respectively. Other essential food items, including pulse gram and pulse mash, also saw significant price decreases in January.
In addition to food price reductions, households are likely to see some relief from lower electricity charges, with electricity rates reduced by 7.48% compared to December 2024. The National Electric Power Regulatory Authority (NEPRA) further decreased the base tariff by 49 paisa per unit, bringing electricity rates to Rs. 6.06 per unit. Additionally, liquefied petroleum gas (LPG) prices have decreased by 46 basis points (bps) month-on-month (MoM).
Looking ahead, further reductions in electricity rates are expected, with federal energy minister Awais Leghari in discussions with the International Monetary Fund (IMF) to lower rates by Rs. 10 to 12 per unit. Additionally, the government’s Winter Package is anticipated to provide further economic relief, easing the financial strain on households.
On the monetary front, the State Bank of Pakistan (SBP) recently reduced the policy rate by 100 basis points to 12%, effective January 28, 2025. This reduction follows five consecutive rate cuts, bringing the total decrease in the policy rate since June 2024 to 1,000 basis points. This continued easing of monetary policy is in response to the slowdown in inflation, which provides policymakers with room to support economic growth.
Despite these rate cuts, the real interest rate (RIR) remains high at 9.1%, with January’s expected inflation rate at 2.93%. This indicates that the SBP’s policy stance remains focused on stimulating economic growth while keeping inflation in check. The central bank has also revised its inflation target for FY25 to an average range of 5.5% to 7.5%, signaling an expectation of stable price levels in the coming months.
On the external front, Pakistan has seen positive developments, with a current account surplus of $582 million in December 2024, bringing the 6MFY25 surplus to $1.21 billion. Remittances from overseas Pakistanis have also surged, increasing by 29.3% in December to reach $3.08 billion. For the first half of FY25, total remittances stood at $17.84 billion, providing much-needed support to Pakistan’s external sector.
However, the SBP acknowledges several risks to the inflation outlook, including volatile global commodity prices, protectionist policies in major economies, fluctuations in perishable food prices, and potential adjustments in energy tariffs. Additionally, any further measures to meet revenue targets could also influence inflation dynamics in the months ahead.
In conclusion, the inflation outlook for January 2025 appears favorable, with a significant reduction in inflation attributed to falling food prices, base effects from last year’s high inflation, and lower utility charges. These developments have prompted the SBP to continue its accommodative monetary policy to support economic growth while keeping inflation in check. The coming months will likely witness further adjustments in energy tariffs, which will play a critical role in shaping the inflation trajectory for FY25.