Inflation surges to 5.6% in Sept, highest in a year

The inflation rate jumped to a one-year high of 5.6% in September due to a surge in prices of non-perishable food items, while the cost of perishable goods decreased despite floods, beating official expectations of a relatively lower price hike.

The Pakistan Bureau of Statistics (PBS) reported on Wednesday that inflation accelerated in both rural and urban centres, with price increases witnessed across various groups of the inflation basket, barring perishable foods.

As a result, inflation surged to 5.6% last month, the highest in a year, exceeding the Ministry of Finance's maximum forecast of 4.5% issued just a day earlier. The inflation bulletin coincided with ongoing talks between Pakistan and the International Monetary Fund (IMF). The economic impact of the floods remains one of the important topics in the discussions, which so far appear calmer compared to earlier rounds.

On Tuesday, the Ministry of Finance informed the IMF that it still expected inflation to remain in the range of 7% to 7.5% during the current fiscal year. This projection is largely in line with the annual target and does not show any major deviation due to the floods.

The Asian Development Bank (ADB) has projected a 6% inflation rate for this fiscal year in its latest regional economic outlook report. Last year, inflation had dropped sharply to 4.5%, the lowest level in nine years. The downward trend continued until last month.

Despite the temporary surge, with the monetary policy at 11%, which is far higher than the headline inflation rate, there may be no need for the central bank to raise interest rates. The State Bank of Pakistan (SBP) last month projected that inflation may gradually increase and could also temporarily breach the 7% target due to base effect erosion and flood-related impacts. The projections, however, showed that inflation would slip back to the target range of 5% to 7% and is expected to stay stable.

The central bank is maintaining interest rates far above prevailing inflation levels, even as it projects that the economic growth target of 4.2% will again be missed this fiscal year. Last month, it estimated growth may remain around 3.3% against the government's 4.2% target. Over the past decade, average growth has been just 3.4%, held back by recurring boom-and-bust cycles that have caused high levels of poverty and unemployment.

The World Bank, in its latest report focusing on Pakistan's poverty rate, warned that the country's economic policies are contributing to poverty instead of bringing it under control. The report highlighted widespread youth unemployment and lack of economic security. However, the rise in inflation may partly benefit the Federal Board of Revenue (FBR), which is still struggling to meet its collection targets and is now depending on exogenous factors such as higher inflation and increased imports of solar panels.

Core inflation, excluding energy and food items, inched up to 7% in cities while remaining stable at 7.8% in rural areas, according to PBS data. Non-food inflation showed a major increase, hitting 5.6% in rural areas and 6.2% in cities. PBS compiles inflation data from 35 cities covering 356 consumer items, and from 27 rural centres covering 244 items.

The data showed that food price inflation slowed to 2.2% in cities and 1.5% in rural areas, due to lower prices of perishable goods.

According to the details, among non-perishable foods, which make up nearly 30% of the inflation basket, prices rose by 6.5% on average last month compared to a year earlier. In contrast, perishable goods recorded a 3.7% decline.

In urban areas, tomato prices surged by 49%, while onion prices fell 40%. The inflation rate for pulses dropped by 25%. Sugar prices jumped 29% in September, followed by a 27% increase in butter, 17.5% in wheat, and 13.5% in wheat flour. The Pakistan Muslim League-Nawaz government had allowed export of 765,000 metric tonnes of wheat and is now in the process of importing the commodity to meet local demand.