Inflation in Pakistan has shown notable moderation in the early months of FY26, offering policymakers some relief after several years of severe price instability. Official data shows that headline inflation remained within the State Bank of Pakistan’s medium-term target range of 5–7% during July–November FY26, marking a clear break from the double-digit inflation experienced throughout much of FY23 and FY24.
The improvement suggests that macroeconomic stabilisation measures are beginning to take effect. Tight monetary policy over the past two years, fiscal consolidation under the International Monetary Fund programme, and easing global commodity prices have all contributed to the downward trend. Headline inflation, which peaked above 38% year-on-year in May 2023, declined steadily through FY24, supported by base effects and weak domestic demand. By the start of FY26, inflation had cooled sufficiently to re-enter the SBP’s comfort zone, boosting cautious optimism among businesses and financial markets.
Food inflation has been a major driver of the improvement. Better agricultural output, improved supply-chain management, and relative exchange-rate stability helped contain prices of essential food items. Data from the Pakistan Bureau of Statistics indicates that food inflation averaged in the mid-single digits during the first five months of FY26, compared with levels exceeding 40% during the peak of the inflation crisis. This easing has provided some relief to household budgets and reduced pressure on the government to expand broad-based subsidies.
Energy prices have also helped anchor headline inflation. Although electricity and gas tariffs remain high due to structural inefficiencies and cost-recovery measures, the pace of increases has slowed. The absence of sharp fuel price shocks and a relatively stable exchange rate have limited imported inflation, allowing transport and utilities inflation to moderate.
Despite these gains, core inflation, which excludes volatile food and energy prices, remains elevated. Hovering in high single digits, core inflation is above the headline rate and the upper bound of the SBP’s target range. This persistence reflects deeper structural pressures, including high business costs, elevated borrowing rates, wage adjustments, and entrenched inflation expectations.
High financing costs remain a key factor. Although the SBP has reduced the policy rate from a peak of 22% in FY24 to 12% by early 2025, borrowing costs are still elevated by historical standards. Businesses often pass these costs on to consumers, particularly in sectors with thin margins. At the same time, repeated bouts of high inflation have changed price-setting behaviour, making firms quicker to raise prices in anticipation of future cost increases.
Wage hikes introduced over the past two fiscal years to protect workers’ purchasing power have also contributed to core inflation. In labour-intensive sectors, higher wages without corresponding productivity gains translate into higher prices, reinforcing inflationary pressures.
The persistence of core inflation presents a policy dilemma for the SBP. While headline inflation within target supports the case for further monetary easing, aggressive rate cuts could reignite demand-side pressures. As a result, the central bank has adopted a cautious, data-dependent approach to future policy decisions.
Looking ahead, sustaining inflation within the target range will require more than monetary restraint. Structural reforms to improve productivity, reduce energy-sector inefficiencies, broaden the tax base, and strengthen competition are essential to easing core inflation. While the recent disinflation marks a welcome shift toward stability, durable price control and renewed economic confidence will depend on addressing these underlying challenges.
Follow the PakBanker Whatsapp Channel for updates across Pakistan’s banking ecosystem.