Inflation drops again in May, but will the relief last?

inflation
Posted by: Tania Farooq 0

Inflation drops again in May, but will the relief last?

Key takeaways

  • Headline inflation for May 2025 is expected at 3.4 percent year over year
  • Prices declined 0.3 percent month over month, the second straight monthly drop
  • Food, transport, and housing segments led the deflation trend
  • AKD revises full-year FY25 inflation estimate to 4.6 percent, from 6.5 percent earlier
  • Inflation expected to remain near the lower end of SBP’s target range through 2025
  • Falling global commodity prices and a stable exchange rate support the outlook

Another month of cooling prices

Pakistan’s inflation continued its downward march in May 2025, with prices falling 0.3 percent compared to April. This marks the second consecutive month of monthly price declines. On an annual basis, inflation is projected at 3.4 percent, up from the all-time low of 0.3 percent recorded in April. While the year-on-year uptick may raise eyebrows, the base effect and segment-specific rebounds explain the trend.

What’s driving the downward trend?

Food prices dropped sharply this month, with tomatoes falling by over 27 percent, potatoes down more than 25 percent, wheat flour lower by 6.8 percent, and chicken sliding 4.5 percent. Housing costs also dropped for the fourth month in a row, thanks to cheaper liquefied hydrocarbons despite a mild increase in electricity tariffs.

The transport sector added further relief. Lower international oil prices led to cuts in Motor Spirit and High-Speed Diesel prices, dropping 0.8 and 1.5 percent respectively. As a result, the transport index decreased by 1 percent month over month.


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Why annual inflation still tick higher?

Despite the monthly relief, inflation on a yearly basis edged up to 3.4 percent in May. This rise was driven by double-digit increases in education, health, and clothing and footwear. The education segment rose by 10.2 percent year over year, while healthcare was up 12.8 percent.

Meanwhile, food prices increased by a modest 2.1 percent year over year, and the housing and transport segments remained deflationary, ,down 1.5 percent and 3.3 percent respectively.

Inflation expectations for FY25 lowered

AKD Securities has revised its full-year FY25 inflation estimate downward to 4.6 percent from 6.5 percent, a significant drop compared to FY24’s 23.4 percent. This is driven by steady food supply, reduced global commodity prices, and a stable currency. The expectation is that inflation will remain near the lower bound of the State Bank of Pakistan’s (SBP‘s) target range over the next 12 months.


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Several factors support this outlook:

  • Declining global commodity prices
  • A fully funded external account
  • Political stability
  • Limited fiscal slippages under the IMF program

Implications for investors and policymakers

The ongoing disinflation offers a window of opportunity for interest rate cuts. Lower inflation also improves purchasing power and business margins across industries. Sectors like autos, consumer discretionary, and cement, which are sensitive to interest rates and inflation, stand to benefit the most.

At the same time, sustained relief from fuel and food prices will reduce cost pressures on households, potentially lifting consumer sentiment and retail demand.

Inflation may have picked up slightly on an annual basis, but the bigger picture tells a story of easing cost pressures. The decline in month-on-month inflation, especially in key categories like food and transport, supports the case for monetary easing. With inflation expected to hover around 4.6 percent this fiscal year, investors and businesses alike can start planning around a more predictable and stable pricing environment.

Source: AKD Securities Research

⚠️ This post reflects the author’s personal opinion and is for informational purposes only. It does not constitute financial advice. Investing involves risk and should be done independently. Read full disclaimer →

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