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CWA # 1608, 4 March 2025
PR Explainer
Inflation reaches a decade low: Why and What next?

  Rohini Reenum

What happened?
On 3 March, according to the Pakistan Bureau of Statistics (PBS) data, Pakistan’s rate of inflation reduced to 1.5 per cent year-on-year in February. This is also the lowest rate since November 2015, marking a historic, almost ten-year low. The headline inflation, which is calculated based on the Consumer Price Index (CPI) also declined by 0.8 per cent month-on-month in February. The urban inflation also declined to 1.8per cent year-on-year as compared to January when it was recorded at 2.7 per cent. Similarly, the rural inflation also decreased to 1.1per cent as compared to 1.9 per cent in January. 

Reacting to the above, PM Shehbaz Sharif expressed his contentment and said“This is very good news on this occasion as the current government completes its first year.” Notably, he pinned this success on the efforts taken by his economic team and expressed further optimism stating“I strongly hope that inflation will decrease further.”

What has been Pakistan’s inflation background?
High inflation has been a key economic challenge for Pakistan for at least the last few years.This is exemplified by the fact that CPI inflation crossed the 10 per cent mark in November 2021and “remained in double digits for the next 33 consecutive months.” It is important to note that the CPI inflation rate has, however, been on the decline since May 2023 when it had reached an all time high of 38 per cent.This surge was primarily fueled by “unprecedented food and energy prices.” The first time the CPI inflation returned to a single digit was in August 2024 when it was recorded at 9.6 per cent. Notably, the current decline in inflation rate has surpassed government (Finance Ministry) expectations which had projected the inflation rate “to remain between 2per cent and 3per cent” in February. According to Business Recorder, the current inflation rate is even lower than that expected by “several brokerage houses.”

In February, what led to the decline in inflation rate?
According to Dawn, the primary reason for the fall in the rate of inflation isthe decline inprices of “perishable” food items, mainly “wheat and its by-products.” It expanded that this decline is also driven by lower prices of other perishable items “like onions, certain pulses, and a slight reduction in electricity charges.” This is because even a slight change in the prices of these products impacts the overall inflation rate as “these products hold significant weight in inflation calculations.”However, both Dawn and The Express Tribune pointed out how except wheat, its by-products, onion and tomatoes, prices of other kitchen essentials like sugar and edible oil continue to be high. This is despite the prices of sugar and edible oil being lower in the international market.

The second reason for this decline is what economists call the base effect. The current decline is sharp because of the high base effect as compared to last year February when it was recorded at 23.1 per cent year-on-year basis.

What does this mean?
When only the rate of inflation declines, as opposed to a general and persistent decline in prices of goods, the economy is said to be going through a period of disinflation. Alternatively, this situation can be described as “a slowdown in inflation.” What is important to note that this “does not indicate a reduction in the cost of living.” Hence, the benefit of this price decrease does not necessarily trickle down to the common people or improve their standard of living/improve their purchasing power.Separately, it is important to note that the Finance Ministry has projected the inflation rate will increase to and between 3 per cent to 4 per cent by March. This decline, however, is a win for macroeconomic indicator health and is sure to buy the country favor with the IMF, especially when the first review is underway. Second, it is also likely to boost investor confidence. Third, this will likely be a key factor in deciding the key interest rate when the Monetary Policy Committee (MPC) of the SBC meets on 10 March. Fourth, it will help the incumbent government’s image whose first year has been marred by political and economic protests.

References
Mubarak Zeb Khan, “Inflation drops to lowest in nearly a decade,” Dawn, 4 March 2025

Shahbaz Rana, “Inflation slows to 1.5% in Feb,” The Express Tribune, 4 March 2025

Mateen Haider, “PM claims credit as inflation drops to 1.5pc,” The Nation, 4 March 2025

“Pakistan's CPI inflation drops to historic 1.5%,” Radio Pakistan, 4 March 2025

“Inflation in Pakistan clocks in at 1.5% in February 2025,” Business Recorder, 3 march 2025

About the author
Rohini Reenum is a PhD Scholar at NIAS.

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