Headline national Inflation in May 2023 hit a new high at 38 percent year-on-year. Both rural and urban inflation recorded their highest ever readings – increasing 42 and 35 percent year-on-year, respectively. Year-to-date inflation is now averaging 29 percent – 2.5 times higher from a year ago. Wholesale, SPI and rural CPI are all averaging north of 30 percent for 11MFY23 – significantly higher than last year.

Non-food inflation has a 57 percent weighted contribution in urban inflation, as core inflation surges to new highs. Core inflation for May averaged north of 23 percent – with urban core inflation breaching 20 percent for the first time ever. The increase is across the spectrum – perishable, non-perishable, electricity, appliances, and so on. Other than the much-criticized house rent and education indices, pretty much every thing has gone dearer deep into double digits.

Cigarettes, textbooks, tea, potato, and wheat flour have gone dearer by 100 percent or more from last year. Only potatoes have a realistic chance of reversing the trend – for all others, the increase may slow down but price reversal is highly unlikely. Administered energy prices are likely to stay high – and another round of price rationalization is always around the corner given the continuous bleeding in the sectors.

Much will depend on what becomes of the IMF program. The upcoming budget may well be without the IMF’s consent and that could offer some breather to prices, only to be revised later, when the inevitability of the IMF program hits hard. The high base effect of last year will start coming into play from June onwards – as around this time last year, the PDM government had finally reversed the petroleum subsidies.

Wheat flour has the highest weighted contribution to both urban and rural CPI – nearly three times the basket weight. Ironic that this has happened right when government officials are busy congratulating each other for the highest wheat crop output. Some room has been found in petroleum prices, allowing the government to lower retail rates on both petrol and HSD. The space for further reduction is very tight, as the recent reduction is largely due to falling refining margins and white oil premiums.

With the revenue targets for next year reportedly 30 percent higher than FY23 – expect more taxes on income and consumption. The currency may still find ways to correct – but the second-round impact of recent deprecation is yet to be reflected in May indices. The HSD price reduction has little direct impact but will go down a long way in at least arresting the pace of increase in all transportable goods’ prices. Prices are generally downward sticky, which almost rules out an incidence of reduced prices outside of commodities sector – for both wholesale and retail.

Given the base impact of last year, inflation will start to cool off in the months to come. This will likely lead to chest thumping in Islamabad. One must lose sight of the fact that the erosion in the purchasing power over the last 14 months has been so massive that it will take a long while before any semblance of parity is restored. CPI may well have peaked here, but the hardships of the commoner are here to stay for much longer.