Pakistan’s headline inflation decelerates further to 11.8% in May 2024

Pakistan’s headline inflation clocked in at 11.8% on a year-on-year basis in May, the Pakistan Bureau of Statistics (PBS) said on Monday, much lower than the reading in April when it stood at 17.3%. On a month-on-month basis, the reading decreased to -3.2%.

“This is the lowest reading since November 2021,” said Mohammed Sohail, CEO of Topline Securities, in a note.

“Tighter monetary and fiscal policies, record agricultural production, and stable currency helped achieve this inflation level,” added Sohail.

“We continue to believe that soon the State Bank of Pakistan (SBP) will cut interest rate as real rates are now at a record high level of note than 1,000 basis points.”

The latest CPI figure takes July-May’s average inflation to 24.52% compared to 29.16% in the same period of the previous year.

The inflation reading is even lower than the government’s expectations, and makes the case stronger for a cut in the key policy rate in the SBP’s upcoming Monetary Policy Committee meeting on June 10.

On Tuesday, the Ministry of Finance, in its ‘Monthly Economic Update and Outlook’ report, had projected CPI-based inflation in Pakistan to hover around 13.5-14.5% in May 2024, and decelerate further in the coming months.

The ministry had said inflation outlook for May 2024 continues downward, attributed to elevated inflation levels previous year and improvements in domestic supply chain of perishable items, staple food like wheat and transportation costs.

Meanwhile, the inflation figure is lower than projections made by a number of brokerage houses as well.

JS Global expected CPI “to clock in at 13.8%, significantly lower than recent months due to high base effect from last year and consecutive MoM declines”.

Meanwhile, in a separate report, Ismail Iqbal Securities, another brokerage house, projected inflation reading to hit 13.1% in May.

Urban, rural inflation

The PBS said CPI inflation urban increased to 14.3% on year-on-year basis in May 2024 as compared to an increase of 19.4% in the previous month and 35.1% in May 2023.

On a month-on-month basis, it decreased to -2.8% in May 2024 as compared to a decrease of 0.1% in the previous month and an increase of 1.5% in May 2023.

CPI inflation rural increased to 8.2% on year-on-year basis in May 2024 as compared to an increase of 14.5% in the previous month and 42.2% in May 2023.

On a month-on-month basis, it decreased to - 3.9% in May 2024 as compared to a decrease of 0.9% in the previous month and an increase of 1.7% in May 2023.

SBP expectations

In its previous meeting, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) maintained the key policy rate at 22%, its seventh successive decision to maintain the status quo.

“The Committee noted that macroeconomic stabilisation measures are contributing to considerable improvement in both inflation and external position, amidst moderate economic recovery.

“However, the MPC viewed that the level of inflation is still high. At the same time, global commodity prices appear to have bottomed out with resilient global growth.

“On balance, the Committee stressed on continuation of the current monetary policy stance to bring inflation down to the target range of 5–7 percent by September 2025.”

The Committee viewed inflation to continue to remain on a downward trajectory.

However, the Committee also noted that this inflation outlook is susceptible to risks emanating from the recent global oil price volatility and bottoming out of other commodity prices; the potential inflationary impact of resolution of circular debt in the energy sector; and tax rate-driven fiscal consolidation going forward.