Inflation slows to three-year low

Islamabad:

Pakistan’s annual inflation rate eased to 9.6 percent in August, the lowest level in nearly three years, due to a higher base effect and lower prices for non-perishable food items. However, there was a notable double-digit acceleration in the prices of other basic goods.

The Pakistan Bureau of Statistics reported on Monday that inflation slowed to 9.6 percent in August compared to the same month last year. This is the slowest rate since October 2021 when it was recorded at 9.2%.

Details show that the decline in inflation is attributed to higher inflation rates in August last year and fall in prices of wheat, flour and cooking oil. Despite this, there was a double-digit increase in the prices of clothing, footwear, perishable food, house rent, water, electricity, natural gas, fuel, health services and education. These increases were affected by the heavy taxation imposed in the budget.

The coalition government has introduced a record Rs 1.8 trillion in new taxes to secure a $7 billion bailout package from the International Monetary Fund (IMF). These taxes mainly target salaried individuals and consumer goods used by all income levels.

The imposition of a 2.5% sales tax and withholding tax on certain supplies has significantly increased the prices of the affected items.

Single-digit headline inflation puts the State Bank of Pakistan in a difficult position. The central bank has been reluctant to make major interest rate cuts despite having considerable room for flexibility and a gradually slowing economy. Last month, the policy rate fell to 19.5%, which was lower than expected.

The new inflation data suggests the central bank could potentially cut interest rates by 3% to 4% at the upcoming Monetary Policy Committee meeting on September 12. However, based on its history, the central bank may choose a more cautious approach, possibly cutting rates to around 1.5%.

In addition, the central bank has been criticized for keeping the value of the rupee below its true value. Tola Associates reported that the rupee was worth Rs 256.71 to a dollar in July, nearly Rs 21 below the market rate. Allowing the rupee to trade at its real value could positively impact inflation and the budget.

For the new fiscal year, the government has set an inflation target of 12 percent, but the IMF predicts the actual rate will be significantly higher. Annual inflation in urban areas fell to 11.7%, while in rural areas it was 6.7% last month. The PBS data showed that urban food inflation rose slightly to 4.1%, while it eased to 1.9% in rural areas.

A decline in food inflation helped keep the overall annual rate below 10%, with a 2.6% decline in non-perishable food. Non-food inflation in urban areas remained at 17.4%, while it eased to 11.9% in rural areas. Core inflation, excluding energy and food, eased slightly to 10.2% in urban areas and 14.4% in rural areas. Average core inflation is now almost 7% below the policy rate.

Despite improvements in the headline inflation index, basic goods posted significant price increases last month. Gas charges increased by 319% compared to the previous year and motor vehicle tax increased by 169%. Inflation in transport services stood at 23%.

Prices of onions increased by 136%, fresh vegetables by 77%, pulses by about 43%, fresh fruits by 27%, milk powder by 24%, meat by 20% and milk by 10%. The government had imposed an 18% sales tax on these items.

In contrast, wheat prices fell by 37%, wheat flour by 34%, and cooking oil by 12%, with a 9% drop in wheat product rates.

The average inflation rate for the first two months of the fiscal year was 10.4%, below the official annual target of 12%. However, in urban areas, average inflation remained at 12.5%.