From CPI Decline to Market Sentiment: Analyzing Pakistan’s Economic Pulse

In July 2024, Pakistan’s economy presented a mixed bag of economic indicators. The Consumer Price Index (CPI) fell to an impressive 33-month low of 11.1%, primarily due to the high base effect from the previous year’s soaring inflation. 

This decline in CPI, despite a sequential uptick in inflation, reflects a complex interplay of factors affecting the economy.

CPI Dynamics and Food Inflation

The July CPI drop was influenced by a significant moderation in food inflation, which registered a mere 1.6% YoY growth, the lowest in nearly five and a half years. 

This reduction starkly contrasts with the hyperinflationary period observed in FY23, where food inflation soared with a monthly average uptick of 312 basis points (bps) and a YoY increase of 38%. 

However, July 2024 still saw a monthly rise in food prices by 4.7%, contributing 1.6% to the overall 2.1% monthly increase in the baseline CPI.

Inflation Forecast and Real Interest Rates

Looking ahead, inflationary pressures are expected to resurface in FY25, driven by several factors. 

A monthly inflation pace of 110 bps is anticipated, with notable spikes between August and October 2024, attributed to potential increases in petroleum development levy and utility charges, including a projected 15% increase in power tariffs and a 20% hike in gas prices. 

Additionally, milk prices, both branded and unbranded, are expected to rise, which could significantly impact the CPI given milk’s weight in the basket.

The forward-looking CPI for FY25 is projected to average around 10%, with temporary spikes potentially pushing it to 14% in mid-2025 before normalizing below 11% by October 2025. 

Despite these inflationary expectations, real interest rates are projected to remain robustly positive. 

At the current policy rate of 19.5%, real interest rates are estimated to be significantly positive, ranging from 5.3% at the peak CPI reading to 11.7% at the lowest.

Market Performance and Economic Outlook

The Karachi Stock Exchange (KSE100) Index closed at 77,740.31 points, reflecting a decrease of 146.68 points. This dip is indicative of the cautious sentiment prevailing in the market amidst the complex economic backdrop. 

Investors are likely grappling with the uncertainty posed by the anticipated inflationary pressures and the overall economic trajectory.

While Pakistan’s current economic indicators suggest a short-term relief in inflationary pressures, the outlook remains cautious. 

The projected rise in utility charges, potential adjustments in policy rates, and volatile food prices could reintroduce inflationary challenges. 

Policymakers and market participants will need to navigate these dynamics carefully to maintain economic stability and foster growth.