Categories: Economy

Inflation expected to drop to 13.1% in May 2024

Inflation in Pakistan is projected to decrease significantly to 13.1% in May 2024, compared to 17.3% in April 2024. This marks a substantial drop and brings some relief after a period of high inflation. On a month-on-month (MoM) basis, inflation is estimated to decrease by 2.1%, following a 0.43% decrease in April 2024. The decline is primarily attributed to a reduction in food prices and favorable financial adjustments.

Key Factors Behind the Decline

The main contributors to the decrease in inflation include:

  • Food Prices: A significant drop of 5.6% in food inflation, particularly in wheat, chicken, fresh fruits, onions, and tomatoes.
  • Financial Adjustments: A downward adjustment in Foreign Currency Accounts (FCA) by 1.8%.
  • High Base Effect: The comparison with the high inflation rates from the previous year also plays a role in the perceived reduction.

Historical Context and Future Expectations

Real interest rates are expected to reach 8.9% in May 2024, the highest in the last 20 years, surpassing the previous peak of 5.4% in April 2015. Despite this, the State Bank of Pakistan (SBP) has maintained a cautious outlook, emphasizing the need to consider the impacts of the national budget and the International Monetary Fund (IMF) program on inflation.

Given the substantial gap between the Policy Rate (PR) and the Consumer Price Index (CPI), there is potential for a rate cut in the upcoming Monetary Policy Committee (MPC) meeting. The significant reduction in inflation, largely driven by lower food prices, was not anticipated at the start of the year.

Inflation Data Breakdown

The table below provides a detailed breakdown of inflation by category for May 2024 and April 2024:

CategoryWeightMay-24Apr-24MoM ChangeContribution (MoM)May-23YoY Change
National Actual100.0%257.8263.3-2.1%2.1%228.013.1%
Food34.6%270.4286.4-5.6%-1.9%264.52.3%
Alcohol & Tobacco1.0%371.7366.115.0%0.0%356.44.3%
Clothing8.6%240.4238.40.9%0.1%203.018.5%
Housing23.6%239.3239.8-0.2%0.0%177.934.5%
Furnishing4.1%259.6266.4-2.6%-0.1%235.110.4%
Health2.8%238.5237.30.5%0.0%201.918.1%
Transport5.9%317.5320.3-0.9%0.1%285.411.3%
Communication2.2%135.5134.90.5%0.0%118.314.6%
Recreation & Culture1.6%260.1258.80.5%0.0%242.97.1%
Education3.8%197.2196.20.5%0.0%171.614.9%
Restaurant & Hotels6.9%270.8269.40.5%0.0%235.015.2%
Miscellaneous4.9%283.6282.20.5%0.0%246.615.0%
Source: SBP, PBS, IIS Research

Conclusion

The projected decrease in inflation for May 2024 is a positive development for Pakistan’s economy. With real interest rates at a two-decade high and a significant drop in food prices, the future economic outlook appears cautiously optimistic. The upcoming MPC meeting will be crucial in determining the next steps for monetary policy.

Disclaimer:

The information in this article is based on research by IIS Research. All efforts have been made to ensure the data represented in this article is as per the research report. This report should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.

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