Karachi, August 29, 2024 – Analysts at Insight Research have forecasted a notable decrease in headline inflation for August 2024, with projections suggesting that it may drop to single digits for the first time since October 2021.
This anticipated decrease in inflation is a significant development for Pakistan’s economy, which has been grappling with high inflation rates for the past few years.
The headline inflation, based on the Consumer Price Index (CPI), is expected to fall to 9.9% in August 2024. This is a sharp decline from the 27.4% recorded during the same period last year and an improvement from the 11.1% reported in the previous month. This would mark the first time in nearly three years that inflation has dipped below the 10% mark, signaling a positive shift in economic conditions.
Despite the positive forecast, the Month-on-Month (MoM) inflation still showed a 60 basis points increase, primarily driven by a 130 basis points rise in food prices. However, the overall impact was partially offset by a reduction in fuel costs, thanks to adjustments in the electricity tariff. These factors have contributed to a mixed inflationary environment, where certain prices have risen while others have fallen.
Within the Sensitive Price Indicator (SPI) basket, several essential items saw significant price increases. Onions led the way with a 23.5% rise, followed by eggs (12.9%), chicken (9.8%), fresh vegetables (7.9%), and pulse gram (3.9%). Conversely, the prices of fresh fruits dropped by 8.1%, motor fuel by 6.0%, wheat flour by 4.5%, pulse masoor by 1.3%, and tomatoes by 0.9%, offering some relief to consumers.
The anticipated decrease in inflation has prompted the central bank to adopt a more accommodative monetary policy stance. The State Bank of Pakistan has already slashed the benchmark rate by 250 basis points over the last two Monetary Policy Committee (MPC) meetings. Analysts expect a further 100 basis points cut in the upcoming MPC meeting scheduled for September 12, 2024.
Secondary market yields have also declined in recent weeks, reflecting expectations of a further cut in the policy rate. With the real interest rate close to 9%, analysts believe there is room for additional rate cuts, although they maintain a cautious outlook. They forecast a gradual easing of the benchmark rate, predicting it to reach 15% by December 2024.
Looking ahead, the trajectory of inflation will largely depend on external factors such as the approval of the IMF program, which is crucial for maintaining stability in the local currency. Additionally, international commodity prices will play a significant role in shaping inflation trends, as any increase could pose challenges to Pakistan’s fragile economic stability.
