Inflation stands at 5.6% in December

The inflation measured by the Consumer Price Index (CPI) stood at 5.6% year-on-year in December 2025, down from 6.1% in the previous month but higher than 4.1% in December 2024, indicating price pressure on households despite the month-on-month decline.

On a month-on-month basis, the CPI decreased by 0.5% in December 2025, against an increase of 0.4% in November and a rise of 0.1% in December last year.

CPI inflation in urban areas rose by 5.8% year-on-year in December 2025, easing from 6.1% in the previous month and higher than 4.4% recorded in December 2024. On a month-on-month basis, urban inflation fell by 0.4%, compared with a 0.5% increase in November, while it had declined by 0.1% in December 2024.

The latest inflation data underscores a deceleration in price pressures towards the end of 2025, largely in line with market expectations. According to brokerage house assessments, the moderation was fuelled mainly by a sharp correction in food prices, particularly perishable items, amid improved supply conditions and a favourable base effect.

"The drop was largely driven by a favourable base effect, easing food prices, and a decline in petroleum product prices, collectively anchoring headline inflation at multi-year lows," noted Arif Habib Limited (AHL).

The headline inflation for December was lower, with food inflation declining by 2.2% month-on-month. Prices of key kitchen staples such as vegetables posted double-digit declines, easing pressure on household budgets after a prolonged period of elevated food costs. This trend also helped bring down overall inflation for the first half of FY26 to around 5.1%, a marked improvement from over 7% recorded in the same period of last year.

However, analysts caution that the relief remains uneven and potentially fragile. While food prices have provided near-term comfort, core inflation indicators continue to signal underlying rigidity, especially in urban centres. Segments such as education, health care, housing-related utilities, restaurants and hotels were the key contributors to price increases, reflecting structural cost pressures rather than cyclical factors.

Urban inflation trends are particularly noteworthy, as cities account for a large share of consumption and services demand. Despite the month-on-month decline, the urban core inflation remains elevated, indicating that price stickiness in services is persisting even as commodity-linked components soften. Rural headline inflation, while slightly lower, also reflects limited pass-through of easing food prices into non-food categories.

"Performance of other segments arrived in a muted form as anticipated, including some of the core segments. Utilities were up slightly for the month, while clothing, education, restaurants, hotels and miscellaneous segments were the main contributors to the increase in core inflation," noted Taurus Securities.

Energy prices remain another critical risk factor. Although declining global oil prices and recent fuel price adjustments have supported the disinflationary trend, Pakistan's energy sector continues to face structural imbalances. Any upward revision in electricity tariffs, gas prices, or petroleum levies, often required to meet fiscal and IMF-related commitments, could quickly feed back into inflation.

Fiscal consolidation pressures add to the challenge. With limited space for subsidies and a heavy reliance on indirect taxation, future budgetary measures could exert upward pressure on prices, particularly affecting urban consumers.

Pakistan's consumer price inflation averaged 3.5% in calendar year 2025, the lowest level in a decade, providing temporary relief to households and policymakers after two years of severe price instability, according to AHL.

Taurus Securities anticipated that the CPI for FY26 would arrive at 6.7% YoY, ie, within the State Bank of Pakistan's target range of 5-7%, driven largely by the base effect. However, some respite can be expected from the recent drop in fuel prices and negative electricity tariff adjustments. Food inflation is also likely to remain in check. Consequently, conditions seem ripe for another 50-basis-point policy rate cut during January 2026.