Normalising inflation

Bringing headline inflation to 30-month low is a positive development for the country’s economy

The efforts to stabilise the economy finally appear to be bearing fruit, as inflation in May dropped to its lowest level since November 2021. Bringing headline inflation to a 30-month low is a positive development for the country’s economy, and if sustained, it could signal the beginning of the end of the economic upheaval of the past few years. According to the PBS, headline inflation dropped to 11.8% year-on-year in May, marking a significant decrease from the previous month’s reading of 17.3% and even lower than the government’s own estimate from just a few days ago, when the finance ministry said the may figure will be somewhere between 13.5% and 14.5%. Inflation in May was about 3.2% lower than the previous month.

The decrease in inflation can be attributed to several factors, including tighter monetary and fiscal policies, record agricultural production, and a more stable rupee. The lower-than-expected inflation figures have also strengthened the case for the SBP to cut its key policy rate in next week’s meeting. S&P recently said a large rate cut may be in the works, with the company projecting a drop of about 450 bps by year end. The government’s own target is to bring the record-high interest rate, 22%, down to under 7% by September 2025, which would require inflation to continue dropping steadily and without any significant upward spikes for the next year.

However, several variables can still come into play, and global oil prices alone can throw off the entire equation if they rise more than projected. Despite prices currently hovering below the $80 mark, experts are projecting prices will shoot past $90 in the next few months before stablising next year. That increase alone could completely throw off policy planning going forward, so an abundance of caution is still necessary. Meanwhile, the Russia-Ukraine war is generating more international tension in the wake of the reports that the US recently authorised Ukraine to use American weapons on Russian soil. Even under the best of circumstances, Pakistan’s economy is still at the mercy of international events.

Published in The Express Tribune, June 5^th, 2024.

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