Inflation rate jumps tofive-month high of 3.5%

Pakistan's annual inflation rate accelerated to 3.5% in May, the highest level in five months, due to a sudden spike in food prices ahead of the budget, breaking the downward spiral that had persisted for a year and a half.

The Pakistan Bureau of Statistics (PBS) reported on Monday that the prices of a basket of essential goods and services rose at an average rate of 3.5% last month. This is the highest reading seen in the past five months and was contrary to official expectations. Nonetheless, it remains far below the fiscal year's inflation target of 12%.

In its monthly economic outlook report, the Ministry of Finance had projected inflation to remain between 1.5% and 2% in May. The actual rate was more than double that forecast and fell within the ministry's expectations for June, ahead of the federal budget.

For June, the ministry has projected that inflation could rise to between 3% and 4%.

With the fresh inflation figure, the gap between headline inflation and the State Bank of Pakistan's (SBP) key policy rate has widened to 7.5%. The banking sector continues to benefit from elevated interest rates, at the expense of the rest of the country.

Last month, the Monetary Policy Committee cut the policy rate by 100 basis points to 11%, citing a sustained decline in inflation. Despite the high rates, the money supply grew by 4.7% in May. For the upcoming fiscal year, the government has set a 7.5% inflation target, allowing further room for interest rate cuts.

Average inflation during the first 11 months (July-May) of the current fiscal year slowed to 4.6%, significantly below the annual target of 12%. This lower average inflation rate will form the basis upon which the increase in pensions and salaries of the government employees will be determined.

The government is considering an increase of 6% to 10% in wages and pensions, in line with the reduced average inflation.

Core inflation excluding food and energy eased in both urban and rural areas, dropping to 7.3% in cities and 8.8% in rural areas, according to PBS.

Average core inflation remains about 3% below the policy rate, providing further space for the SBP to reduce interest rates. However, under International Monetary Fund (IMF) policy, the government switched the benchmark for borrowing costs from core to headline inflation nearly four years ago.

Urban inflation rose to 3.5%, driven by rising food costs. In rural areas, prices turned positive again, with inflation recorded at 3.4% in May.

PBS compiles inflation data from 35 cities and tracks 356 consumer items. In rural regions, data is collected from 27 centres and includes 244 items.

The PBS data showed that food prices resumed their upward trend. Urban food inflation was recorded at 5.3%, and rural food inflation at 2.1%. Chicken prices soared 52% last month, followed by a one-third increase in pulses, a 30% rise in fresh fruits, 26% in butter, 22% in powdered milk, and 21% in sugar.

The government failed to honour its promise of keeping sugar prices in check, following last year's decision to allow exports. The rise in sugar prices is also boosting tax revenues, as the government has linked the 18% sales tax on sugar to the fortnightly inflation rate.

Meat prices increased by 12%, while fresh milk rose by 10%.

Onion prices remained 54% lower compared to a year ago, while tomato prices dropped 32%, wheat 24%, and tea 18%. Non-perishable food items saw a 5.1% increase in inflation last month.

Electricity charges were 29% lower year-on-year, while petrol remained 8% cheaper despite increased taxation. Although global crude oil prices have remained largely stable, the depreciation of the rupee led the government to pass on a Rs3.5 per litre impact on petrol and Rs1 per litre on diesel.

Global crude prices are not expected to rise significantly, and overall commodity prices are projected to decline by 15% this year.