Pakistan’s inflation problem has returned with renewed intensity, raising fresh questions about the sustainability of the economic stabilisation achieved over the past year.
The Pakistan Bureau of Statistics (PBS) has placed Consumer Price Index (CPI) inflation at 11.1 percent for August, up sharply from 9.2 percent in July. The increase is particularly concerning because it comes at the beginning of the new fiscal year, when policymakers had hoped that easing inflation would provide some relief to households and create greater room for economic recovery. The August CPI reading is exactly the same as the rate recorded in June, while it is 0.6 percentage points lower than May’s figure and 0.2 percentage points higher than the April reading. More importantly, the comparison with the corresponding period of last year highlights the magnitude of the deterioration. Average CPI inflation during July-August 2025 stood at just 3.56 percent, compared with 10.17 percent during the first two months of the current fiscal year.
The immediate explanation lies largely in the continuing turmoil in the Middle East, which has disrupted international supplies and pushed up the cost of petroleum products, including diesel and aviation fuel, as well as fertilisers and helium. The disruption has also affected transportation routes. With cargo being moved to Gulf countries by air rather than through cheaper maritime shipping, transportation costs have increased substantially, eventually feeding into the prices paid by consumers.
But blaming the entire inflationary surge on external developments would be too simplistic. The widening gap between consumer and wholesale inflation deserves much closer attention from the government’s economic managers because it points to deeper weaknesses in Pakistan’s pricing and distribution system.
PBS data shows that the Wholesale Price Index (WPI) was negative 0.74 percent during July-August 2025. A negative WPI essentially meant that prices of goods traded in bulk at the wholesale level were declining, or that the wholesale economy was experiencing deflation. The contrast with the current year is striking: while wholesale prices were falling during the corresponding period last year, consumer prices are now rising at double-digit rates.
There are several reasons why the two indicators can behave so differently, and each deserves serious consideration.
The first is that CPI captures a wider range of services that are not adequately represented in the WPI. Doctors’ fees, hospital charges, education expenses and other services are included in consumer inflation and can rise periodically even when wholesale prices of goods remain relatively stable. These costs directly affect households but may not be reflected in wholesale price movements.
The second factor is Pakistan’s extensive network of intermediaries and middlemen. The role of middlemen is particularly significant in agriculture, where aarthis often maintain longstanding relationships with farmers, purchase seasonal crops and subsequently sell them at substantially higher prices. The difference between what the farmer receives and what the consumer ultimately pays can therefore be considerable.
This disconnect between producer and consumer prices is not unique to agriculture, but the scale of intermediary activity across Pakistan’s economy makes it particularly important. A fall in the price received by a producer does not necessarily translate immediately into a lower retail price. Changes can take considerable time to move through the supply chain, while increases in regulated prices can be passed on to consumers almost instantly.
Petroleum provides a clear example. When the government increases the price of fuel, the impact is rapidly reflected in transportation and distribution costs throughout the economy. But when international prices fall, reductions do not necessarily travel through the supply chain with the same speed. Downward price adjustments are often resisted by businesses and intermediaries, creating an asymmetric pricing mechanism in which increases are transmitted faster than decreases.
The composition of the two indices also matters. WPI is heavily influenced by industrial inputs such as raw materials and fuel, while CPI measures the prices ultimately paid by consumers. The cost of industrial inputs has been under considerable pressure in recent years, partly because of higher energy and other costs associated with economic reforms and IMF-linked policy adjustments since 2019.
Yet Pakistan’s inflation problem cannot be fully understood without considering the country’s large informal economy. The informal sector is estimated to account for almost half the size of the formal economy. Prices in this segment are often determined less by transparent market mechanisms than by the seller’s assessment of a customer’s ability to pay.
A familiar example can be seen in everyday street commerce. A vendor may quote a considerably higher price to a customer arriving in an expensive vehicle while offering the same product at a much lower price to someone arriving on a bicycle. Such practices make price formation less transparent and make it difficult for official statistics to capture the full complexity of consumer behaviour.
Successive governments have attempted to bring informal businesses, including small traders, into the tax net. The effort, however, has repeatedly faced strong resistance. Traders and other informal-sector operators have generally opposed measures that could increase documentation and taxation, while the government has struggled to develop a system that can broaden the tax base without creating excessive compliance costs.
The fundamental problem is Pakistan’s continued dependence on indirect taxation. Official budget documents put the share of indirect taxes at around 50 percent of total tax revenue, but the actual burden is arguably higher. A significant portion of what is classified as direct taxation consists of withholding taxes collected on transactions and sales. These are effectively indirect taxes in economic terms and are estimated to account for around 70 percent of total direct-tax collections.
This distinction matters enormously in a country where poverty remains widespread. Indirect taxes impose a proportionately heavier burden on low- and middle-income households because poorer families spend most of their income on consumption. A wealthy household can save a larger proportion of its income, whereas a low-income family has little choice but to spend on food, transport, energy and other necessities.
The government must therefore look beyond the headline inflation number and examine the components of its own revenue policies that are contributing to the cost-of-living crisis. The petroleum levy is particularly relevant. The levy has been budgeted to generate around Rs1.6 trillion during the current fiscal year, making it an important source of federal revenue. But every increase in fuel taxation has consequences that extend far beyond motorists.
Higher fuel prices raise transportation costs, increase the cost of moving agricultural produce and manufactured goods, and eventually affect prices throughout the economy. At a time when the World Bank estimates that 42.4 percent of Pakistan’s population lives below the poverty line, policymakers need to consider whether the short-term revenue gained from such measures is worth the broader inflationary and social cost.
Pakistan certainly needs stronger revenue collection and fiscal discipline. But raising revenue should not simply mean extracting more money from consumption because it is easier to collect. The country requires a fundamental shift towards direct taxation based on the ability-to-pay principle, combined with serious efforts to document the informal economy and bring untaxed income and wealth into the tax system.
The August inflation figures should therefore be treated as more than another monthly statistic. They are a warning that external shocks are interacting with longstanding domestic weaknesses in taxation, distribution, energy pricing and market regulation. The Middle East crisis may have triggered much of the latest pressure, but it has exposed vulnerabilities that existed long before the current geopolitical turmoil.
Macroeconomic stabilisation cannot be considered complete while household purchasing power continues to erode and inflation disproportionately hurts those least able to absorb it. The government now faces the difficult task of protecting vulnerable households without undermining fiscal stability.
That requires more than monetary tightening or short-term relief measures. It requires structural tax reform, greater transparency in pricing, stronger competition across supply chains and a gradual reduction in reliance on taxes that fall most heavily on consumption.
For Pakistan, the real test is not simply whether inflation can be brought down again after the current shock. It is whether the country can build an economic system in which future shocks do not repeatedly translate into an unbearable burden for ordinary citizens.