The downward journey of headline inflation continues, with the CPI clocking in at 4.9 percent in November 2024, marking the lowest reading since May 2018. The CPI in November 2023 was 29.2 percent and 7.2 percent in October 2024. The 5MFY24 average inflation stood at 9.7 percent.

The below-5-percent figure comes as no surprise, as it was expected due to the high base effect caused by the abnormal increase in gas prices last year. The figure is slightly higher than analysts’ estimates, as health and footwear prices rose significantly. This has kept core inflation somewhat elevated—urban core inflation stands at 8.9 percent, while rural core inflation, at 10.9 percent, remains in double digits.

The sharp decline is mainly in food inflation—urban food inflation is at 1.7 percent, while rural food inflation is negative, with the rural food index down by 0.2 percent in November 2024 compared to November 2023. Some signs of deflation are evident in rural areas due to this trend. Global and domestic commodity prices have crashed, with wheat flour prices down by one-third from their peak at the start of 2024. This has dented farm incomes, suppressing demand for other items and resulting in a widespread decline in inflation.

Interestingly, non-perishable food items inflation is down by 1.6 percent year-on-year (YoY), with a 3 percent decline for the rural community. Wheat flour is down by 35 percent, while wheat products show a 10.4 percent decline. Additionally, prices of sugar and tea have dipped by 4–6 percent compared to November 2023.

However, despite the sharp decline in food prices, the second-round impact of inflation persists in some areas. For example, the clothing and footwear sub-index rose by 3.1 percent month-on-month (MoM) in November, with a YoY increase of 15.6 percent. Footwear prices jumped by 13 percent in a month and 32 percent YoY, with an astonishing 75 percent YoY increase for ladies’ sandals—posing challenges for husbands trying to keep their wives happy amidst low inflation.

Another notable increase is in health expenditures. The health sub-index rose by 2.4 percent MoM, with a YoY increase of 13.1 percent in November 2024. Prices of drugs and medicines alone increased by 4.4 percent in just one month.

Scattered increases in prices are also evident. On a yearly basis, inflation in health, clothing and footwear, education, and miscellaneous items remains in double digits, partially offsetting the decline in food and motor fuel prices. Here, the base effect plays a significant role. Over the past two years, currency depreciation and the global commodity supercycle have driven food and energy prices to unprecedented levels, and these are now normalizing.

Some pundits are overly enthusiastic about the decline, suggesting a return to single-digit interest rates. The policy rate has already been reduced from 22 percent to 15 percent over four reviews, with another 150–200 basis point cut expected in December. Market yields are already hovering around 12 percent.

The SBP must take note of this and remain vigilant about the base effect, resisting the pressure from twin cities. The low base effect is tricky; any slight reversal in demand or international commodity prices could drive prices significantly higher in the coming quarters. Real money (M2) growth has already surpassed the twenty-year average. Sooner or later, this will translate into inflation. It would be prudent for the SBP to address this and focus on keeping inflation within its medium-term band of 5–7 percent.