In May 2023, Pakistan’s consumer price index (CPI) inflation hit an all-time high of 38 per cent. Today, it stands at 4.9pc — a seemingly remarkable feat considering the country was at the precipice of a default last year before it clinched a last-minute International Monetary Fund (IMF) bailout.

A Reuters report explains that when inflation numbers run high, it can cause big problems for the economy, not just because people and businesses hate paying more for everyday items, but because it can turn into a vicious cycle. Workers find that with higher prices, their paychecks do not go as far, so they demand higher wages, which businesses pay for by raising their prices, which then further strains paychecks.

To counter that, the State Bank of Pakistan (SBP) stepped in and raised interest rates to an all-time high of 22pc in June 2023. Hiking interest rates make borrowing more expensive and restrain spending and, eventually, inflation since hiking interest rates seemingly curbs demand.

In 2024, however, the SBP finally started tinkering with the interest rate. In June 2024, the SBP finally cut the interest rate by 150 basis points (bps) to 20.5pc — its first rate cut in four years — citing that data showed inflation slowed to a 30-month low of 11.8pc in May 2024. This essentially started SBP’s trajectory to ease interest rates based on its inflation outlook — having it currently reduced to 13pc in December.

For a developing country such as Pakistan, other statistics are far more sobering. According to to the World Bank, the current poverty rate in the country stands at 40.5pc with an additional 2.6 million Pakistanis falling below the poverty line. In the World Economic Forum’s gender report, the country ranked 142 out of 146 countries — ahead of just Iran, Algeria, Chad and Afghanistan.

That is not all, the country has to endure multipronged challenges of climate change, gender and poverty — all inextricably linked with one another. So what does it mean when economic oracles celebrate inflation coming down? Do prices come down with it? Do decreasing inflation numbers provide a sigh of relief to the masses?

The simple answer is no, the prices do not go down. Pakistan, like other countries, measures average inflation using the Consumer Price Index (CPI). A previous Dawn report notes that the current scenario is one of disinflation, which indicates a decrease in the pace of the inflation rate, whereas deflation (the opposite of inflation) occurs when general price levels fall.

For example, Pakistan’s annual inflation rose to 37.97pc year-on-year in May 2023, showing a continued uptick in the highest-ever inflation in the country. In August 2024, it rose to single digits of 9.6pc — signifying a slower change of rate rather than decreasing prices.

What is disinflation?

Reuters says that a drop in the rate of inflation like that is called disinflation. It simply means that prices are still rising but at a slower pace.

As noted in a previous Dawn report, as per Sensitive Price Indicator (SPI) data, the national average price of a 20kg bag of flour fell to Rs1,580-2,200 in the third week of December, from Rs2,666-2,960 at the beginning of the year.

But the price of a one kg packet of ghee rose from Rs470-575 to Rs545-575. The price of gram pulse (daal chana) is now Rs330-470/kg, compared to Rs220-300/kg in January. The rate of one kilo of mutton and beef (average quality with bones) is Rs1,550-2,400 and Rs700-1,300, compared to Rs1,400-2,200 and Rs600-1,100, respectively, in the first week of January.

Miftah Ismail, former finance minister, while speaking to Dawn.com said, that the inflation rate going down does not necessarily mean the price levels have gone down.

“You have to understand that price levels have not gone down, inflation has gone down which only means that the rate at which prices were increasing has fallen,” he stated. “So, last year, the prices were increasing at the rate of 24 per annum, while this year prices are increasing at the rate of about 9 pc per annum.”

“So prices have not come down, the rate of change of price has come down but prices are still higher today than they were last year,” he elaborated. “That’s the first part of the equation. The second part is your purchasing ability — your purchasing power. Your last year’s wage increase was less than 10pc and your inflation was 24pc, which meant your purchasing power had already gone down by 14pc last year.

“Now if this year, inflation is 10pc and your wages go up by five pc, you again become poorer by five pc,” he explained. “So you don’t really see an improvement in your daily life.”

How did Pakistan reach its all-time high inflation

Ismail explained that “From 2022 October onwards, the government of Pakistan held the rupee artificially against the dollar at 229 — against the wishes of the IMF and finally when the government realised this was the wrong policy, they let the dollar go and the dollar went from Rs230 to Rs270 in just a matter of days and that brought in a new round of inflation.

“February, March, April and May were the four worst months of inflation in the history of Pakistan — coupled with that we still did not have an agreement with the IMF so there was a demand for dollars and people wanted to store their wealth in dollars,” he stated, adding that people wanted to take money out of the country due to the govt’s “mistaken” policy, forcing Pakistanis to store their wealth in dollars rather than rupee.

“So this devalued the Pakistani rupee and brought in the crushing inflation in May 2023,” he explained. “But then in June, the government made an agreement with the IMF and since then things have stabilised.

“The SBP had used only one policy instrument which is interest rates, they jacked up interest rates to 22pc, which obviously helped curtail the demand of goods and services in Pakistan — but I think a bigger help was the downturn of international commodity prices,” he added.

Meanwhile, Ammar Khan, an economist, explained that inflation effectively measured the “change in prices relative to a specific period, whether that is the same period last year, or last month, or last week”.

Therefore, according to Khan, in May 2023, annual inflation was measured at 38pc, which meant that, on average, the price of a basket of goods increased by 38pc relative to May 2022.

As for the record-high inflation noted in Pakistan, he said the increase was “largely a function of devaluation of the rupee in preceding months, as well as an increase in fuel prices”.

He delineated that since Pakistan’s economy is import-dependent, as the rupee lost its value, the prices of goods and services being sold in the rupee increased — fuelling inflation in the process

Meanwhile, Sajid Amin Javed, deputy executive director at Sustainable Development Policy Institute (SDPI) and economist, noted major drivers behind the country’s record-high inflation to be loose monetary policy, and spikes in global oil and food prices due to the Ukraine war.

“Little implementation and then followed by a complete halt to the IMF programme, and steep fall of the rupee against the dollar also increased volatility,” he highlighted.

How did the inflation rate taper off

Ismail, noted, “And now — although Pakistan has failed to carry out any reforms — the international price of oil has gone down and commodity prices whether of cotton, wheat, rice and edible oil have gone down and that has resulted in lower inflation rate in Pakistan.”

Moreover, he went on to list three factors behind the low inflation rate.

“Number one is the IMF agreement and second is the international commodity prices,” he said. “And third is that our economy has slowed down so much, the demand is low — that has also brought inflation [rate] down.”

Khan said, “Import restrictions and a focus on controlling budget deficits led to reduced demand or contraction in demand relative to last year.

“As demand contracted, or did not increase at a faster pace, the rate of increase in prices of goods and services also slowed down,” he highlighted. “ The tapering off of inflation can largely be linked to macroeconomic stabilisation goals of the government during last 12 months.“

Amin said that the faster-than-expected decline in the inflation rate could be credited towards a higher base of 2023, a tight monetary stance of the SBP, and falling global oil prices.

Furthermore, he highlighted that there was a fall in food inflation too because of a bumper wheat crop and “reduced pressure” on the economy due to getting the IMF bailout back, which stabilised the rupee against the dollar.

Current scenario

The IMF, in its report, cautioned central banks must remain vigilant “along the last mile of disinflation”.

Noting sticky inflation in some economies, it warned that “an intensification of geopolitical tensions could further disrupt shipping and energy production and push up inflation once again.

“So far, financial markets have remained broadly sanguine about stalling disinflation and other headwinds and risks, with volatility in major asset classes currently at low levels despite elevated measures of economic policy uncertainty,” it said.

Similarly, the SBP has echoed the same sentiments time and time again. In December 2023, it had hinted at sticky inflation due to the gas price hike. In its recent monetary policy announcement in 2024, it warned that core inflation, which stood at 9.7pc, was “proving to be sticky, whereas inflation expectations of consumers and businesses remain volatile”, deciding on a cautionary approach.

Regarding Pakistan’s case, Khan told Dawn.com that he expected inflation “to stay within the range of low double digits, or high single digits over the next 12 months, as long as fiscal deficits remain under control, and the government does not go on an expansionary growth regime without corresponding flow of foreign currency”.

“In the absence of an export-oriented growth strategy, any growth achieved through import-oriented consumption will lead to higher inflation due to the depreciation of the rupee,” he added.

As for the future outlook, Amin estimated that the downward trend was “likely to continue in 2025”.

“With IMF programme in place, policy rates moving towards single digit from historic high 22.5pc and low growth targets, the inflation outlook is better,” he said.

“It is important to note this decline in inflation means that prices are still increasing but at a rate slower than last year. People are still suffering higher prices low-income trap. The government now needs to work to improve economic activity and create livelihoods and income opportunities for people,” he stressed.

“This is the only way forward for improving the purchasing power of people who have been crushed by skyrocketing prices in the last four to five years.”

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