Who would have thought the often-mocked State Bank of Pakistan’s medium-term inflation target range of 5-7 percent would have the last laugh. Sooner than anyone (including the SBP) thought. Granted that this may well be temporary, as there is every realistic chance of inflation inching up from the f44-month low of 6.9 percent. But it is nonetheless a significant moment, and one that would hasten calls for deeper cuts in the policy rate in the near future.

September 2024 reading is a record galore for those keeping track – at national headline, urban, rural, wholesale and sectoral basket levels. Consider these. Headline year-on-year inflation in urban settings at 9.29 percent is at a 36-month low, and also the first instance of single-digit reading in three years. Urban food year-on-year inflation at 0.81 percent is the lowest since December 2018, at a 69-month low.

It gets more astonishing. Rural year-on-year headline inflation at 3.65 percent is at a 78-month low – lowest since April 2018. Food year-on-year inflation in rural settings at negative 2.1 percent is the lowest in 87 months since the rebasing started in July 2017. Negative year-on-year readings are a very rare occurrence and have happened only twice in the last six years. It was as recent as May 2023 when rural food inflation had touched an all-time high of 52 percent year-on-year.

There is clearly a base effect in play, but the demand destruction is also visible in how food prices have played out. Major food items from wheat to sugar and from rice to cooking oil – are all priced lower than the same period last year at the retail level. The first instance of that happening was in August 2024, the second one is September 2024.

The price setting power at the producers’ level appears diminished, as evident from just 10 percent year-on-year surge in fresh milk prices. Fresh milk and products have the highest weightage in food basket and despite imposition of standard sales tax on packaged milk – the price increase has been contained. Milk prices in the preceding four years had risen by an average 20 percent year-on-year.

The other major respite comes from the housing, gas and electricity sub-sector, where the impact is more pronounced in rural settings (due to natural gas not being a part of the basket). A 6.7 percent year-on-year increase in rural housing, gas, electricity, etc. sub-sector with a weight of 18 percent – is the lowest in 44 months, led by reduction in electricity charges. On a month-on-month basis, electricity prices went down as September 2024 saw the first instance of negative monthly Fuel Charged Adjustment in electricity bills in 19 months.

While the negative monthly adjustment is also slated for October bills, effective electricity tariffs for all consumer categories will increase significantly with effect from October, as the federal and Punjab subsidy schemes come to an end. Recall that the federal government had delayed imposition of revised base tariff on protected and unprotected consumer categories using up to 200 units. In addition, Punjab government announced Rs14/unit for two months for five discos. There is also a high likelihood of quarterly tariff adjustments shooting up once again, this time largely due to significantly reduced generation than referenced.

Remarkably stable currency along with a massive respite in international energy commodity prices has helped the government reduce retail petroleum prices significantly. The government has also, rather surprisingly, so far refrained from imposing higher Petroleum Levy, having forgone an estimated Rs50 billion in revenues in the first seven fortnights of FY25. It remains to be seen how long can this continue, given the IMF program is finally here. Mind you, the FBR is estimated to have missed the 1QFY25 tax target by almost Rs100 billion.

Much will depend upon how stringent or otherwise the IMF program conditions turn out to be. For now, the calm in international commodity markets, resilient currency and tapered demand are all favoring the SBP to achieve its medium-term target of 5-7 percent inflation earlier than 1QFY26.