PkRevenue.com – Headline inflation in Pakistan is projected to continue its downward trajectory, with the Consumer Price Index (CPI) for May 2024 estimated at 12.9%, a significant drop from 17.3% in April 2024 and a dramatic decline from 38.0% in the same period last year, according to analysts at Insight Securities (Pvt) Ltd.
On a month-on-month (MoM) basis, inflation is expected to decrease by 230 basis points (bps) in May 2024, compared to a decline of 43 bps in April 2024. This marks the second consecutive month of MoM inflation decline, a trend not seen in almost three years.
The notable decrease in inflation is primarily driven by a 600 bps drop in the food basket and a 200 bps decline in the housing index. The significant reduction in food prices is largely due to a sharp decline in wheat prices amid procurement issues in Punjab, alongside price decreases in other perishable food items. The decline in the housing index is attributed to a lower month-on-month Fuel Cost Adjustment (FCA).
Within the Sensitive Price Indicator (SPI) basket, several items recorded significant price increases during the period. Potatoes saw the highest increase at 32.9%, followed by readymade garments at 3.9%, cotton cloth at 3.5%, meat at 3.4%, and milk powder at 2.9%. Conversely, the prices of several items eased off, including onions (down 44.0%), tomatoes (down 30.0%), chicken (down 26.3%), wheat flour (down 24.0%), and fresh fruit (down 18.6%).
Despite the positive real rate on a spot basis, the State Bank of Pakistan (SBP) decided to maintain the policy rate during the latest Monetary Policy Committee (MPC) meeting. The central bank cited uncertainties surrounding fiscal measures in the upcoming budget that could impact the inflation trajectory. Additionally, the global pace of inflation slowdown remains uncertain, and major central banks are adopting a cautious approach, prompting the SBP to maintain the status quo.
Given the steep decline in headline inflation, there is significant room for the SBP to reduce the benchmark interest rate. However, the timing of such a move will depend on the announcement of the FY25 budget and details of the next IMF program, as these factors are likely to have inflationary consequences. Adjustments to the interest rate, if any, are expected to be moderate and gradual.
The expected decline in inflation provides some optimism for economic stability, though the impact of forthcoming fiscal policies and international economic conditions will play a critical role in determining the future inflation trajectory and monetary policy adjustments.
