Inflation has taken center stage in Pakistan, reaching historic highs and causing distress for the citizens. Recent hikes in power and petrol prices paint a grim picture.

Inflation has reached an unprecedented peak in the nation’s history, spelling further hardships for the common people. The recent staggering increase of Rs41 per liter in petrol prices over the last two hikes is set to escalate inflationary pressures to a range of 30-32 percent for September, up from 27.4 percent in August.

The Consumer Price Index (CPI) is expected to rise by at least three percent, possibly reaching up to five percent in September. This surge can be attributed primarily to two factors: the remarkable spike in petroleum product prices and the lower base effect. There was a slight reprieve in the weekly inflation reading, as indicated by the Sensitive Price Indicator (SPI), which decreased by 0.25% for the first time in eight weeks. This was thanks to reductions in sugar and chicken prices during the week ending September 14.

However, inflation still remains relatively high. According to the Pakistan Bureau of Statistics (PBS), out of 51 items, prices of 24 items (47.06%) increased, 8 items (15.69%) decreased, and 19 items (37.25%) remained unchanged compared to the previous week. The decrease in prices was particularly notable in food items, with sugar dropping by 9.11%, chicken decreasing by 5.47%, eggs by 2.79%, bananas by 0.86%, Lipton tea by 0.59%, gram pulse by 0.57%, 1kg vegetable ghee by 0.16%, and five-litre cooking oil by 0.10% compared to the previous week.

However, on a year-on-year basis, the inflation rate showed a significant increase of 26.25%. Key items such as wheat flour prices surged by 114.37%, Q1 gas charges increased by 108.38%, and broken Basmati rice saw a substantial rise of 91.07%, among others. Notably, sugar prices had doubled to Rs200 per kg in some cities in recent months, compared to Rs120 per kg, primarily due to hoarding and smuggling. Efforts to crackdown on these illegal activities have helped reduce sugar prices. According to the PBS, the average sugar price dropped to Rs165.40/kg in the reviewed week, down from Rs181.98 in the previous week. Approximately a year ago, sugar was available at an average price of Rs86.93/kg nationwide.

Similarly, the average chicken price decreased to Rs358.14/kg in the week, compared to Rs389.46/kg in the previous week. A year ago, it was available at Rs282.13/kg. However, in general, food prices have remained close to their recent highs, putting pressure on household purchasing power and disposable income over the past year and a half.

These price increases were influenced in part by the rising global food and energy prices and partly due to the significant depreciation of the rupee, which made imports more expensive. The central bank anticipates that the monthly inflation reading, measured through the Consumer Price Index (CPI), will remain elevated in September but start to decrease from October onwards. Prices are expected to sharply decline in the second half of the current fiscal year. In its monetary policy statement, the central bank noted that although inflation decreased from May to July-August FY24, the decline was less than anticipated, primarily due to the surge in global oil prices and their impact on administered energy prices.

Despite the recent surge in global oil prices, which is being passed on to consumers through adjustments in energy prices, the central bank anticipates that inflation will follow a downward trajectory, especially in the latter half of this year. The rise in international oil prices can be attributed to supply cuts by Russia and Saudi Arabia, as well as increased demand from China, fueled by a recent stimulus package aimed at boosting economic growth. If Brent crude prices continue to escalate, it may lead to an increase in CPI-based inflation in the months ahead. Notably, the caretaker government increased petrol prices three times in the last month, totaling an increase of Rs58.4 per liter. These hikes occurred on August 16, with a Rs17.50 per liter increase, on September 1 with a Rs14.91 increase, and on September 16 with a Rs26.02 increase.

Official data reflects that in September 2022, there was a record low monthly inflation rate of 23.2 percent due to a lower base effect. The CPI Index also fell by 1.15 percent by August 21, primarily because of a significant 65.3 percent drop in electricity prices from August 21 to September 22. While petroleum prices hold a weightage of almost 4.6 percent in the CPI-based index, their multiplier effect on transportation fares is expected to drive inflation in the coming months, as transportation authorities may increase fares. Therefore, CPI-based data could reflect a surge in fares in the next month.

There are several factors which influence inflation in Pakistan, including an aggregate demand for goods and services outpacing supply. The global increase in commodity prices has a pronounced impact in Pakistan, given its heavy dependence on imports, including petroleum products, edible oil, machinery, food, vehicles, mobiles, and industrial raw materials. Imports account for more than 25 percent of Pakistan’s GDP. Moreover, rising administered energy prices, a weakening rupee, and the imposition of a nearly Rs60 Petroleum Development Levy have contributed to higher inflation. Weak productivity levels and supply-side disruptions due to floods have also played a role in pushing inflation higher.

As Pakistan grapples with soaring inflation, it faces a complex web of factors including global commodity prices, supply disruptions, and fiscal deficits. The government must take strategic steps to stabilize the economy, including monitoring key food items, ensuring a steady supply of affordable fuels, and implementing long-term reforms in the energy and agriculture sectors. While the road ahead may be challenging, effective measures can help ease the burden on the common man and steer the nation towards economic stability and prosperity.