Pakistan’s inflation rate is forecasted to drop to 4.0% in December 2024, marking a 6.5-year low and continuing the sharp disinflation trend seen in recent months. This follows a 4.9% Consumer Price Index (CPI) reading in November 2024, reflecting a significant improvement in price stability. According to JS Global, the anticipated drop in inflation is primarily attributed to a favorable base effect stemming from last year’s elevated inflation. A marginal 1 basis point (bp) month-on-month (MoM) increase in headline inflation is expected for December.
If realized, this will lower the first-half fiscal year 2025 (1HFY25) average inflation rate to 7.3%, a significant decrease compared to the 28.8% average recorded during the first half of FY2024. Core inflation, which excludes volatile food and energy prices, is projected at 10.8% year-on-year (YoY) for December 2024, with an MoM uptick of 80bps. The education category, holding a 3.8% weight in the inflation basket, is expected to see a notable 110bps increase this month. Last month, core inflation had already dipped into single digits, with urban core inflation at 8.9% and rural core inflation at 10.9%.
Food inflation is anticipated to remain almost flat YoY, registering a negligible increase of 0.03%. This marks a stark contrast to the 27.5% food inflation recorded in December 2023. On a MoM basis, food prices are expected to decline by 23bps, with sequential decreases in food costs (which account for 35% of the inflation basket) helping to curb YoY CPI growth further. Stable global oil prices have contributed to keeping petroleum product prices steady. As a result, the Transport Index, which carries a 6% weight in the CPI basket, is expected to experience a slight MoM increase of 30bps in December.
Despite the State Bank of Pakistan (SBP) recently reducing the policy rate by 200bps, bringing the total rate cuts over the past six months to 900bps, real interest rates (RIR) remain high due to ongoing sharp disinflation. With the expected CPI reading of 4.0% in December, RIR is projected to reach approximately 9 percentage points. On normalized CPI levels of around 10% anticipated in the long run, the RIR at the current policy rate would still stand at 3 percentage points. This declining inflation trend strengthens the case for further monetary easing in the SBP’s next Monetary Policy Committee meeting. Analysts predict that inflation will remain low for the remainder of FY2025, potentially until May 2025, providing a supportive environment for further economic recovery.
The sustained disinflation trend offers a positive outlook for Pakistan’s economy, easing pressure on households and businesses alike. Additionally, the low inflation environment, coupled with high RIR, positions the SBP to adopt more accommodative monetary policies, which could stimulate economic growth in the coming months. As Pakistan closes out 2024, the consistent drop in inflation rates underscores the impact of effective fiscal and monetary strategies, paving the way for a more stable economic environment in 2025.