Pakistan’s Inflation Rate For December Likely to Drop to New 6.5-Year Low

Following a 4.9 percent reading in November 2024, the CPI is expected to drop to 4.0 percent in December 2024, marking a 6.5-year low and continuing Pakistan’s current sharp disinflation trend. According to JS Global, this is primarily driven by a favorable base effect from the mounting inflation of the previous year. A meagre 1bp MoM increase in headline inflation could be seen. This would take the 1HFY25 average to 7.3 percent, down from the 1HFY24 average of 28.8 percent. Core inflation is expected to clock in at 10.8 percent YoY in Dec-2024, with a MoM uptick of 80bp. The education category (weight 3.8 percent) is expected to post a 110bps jump in December 2024. Note that core inflation, which excludes food and energy items, came in single digits last month. Urban core inflation was registered at 8.9 percent in November 2024, while rural core inflation was reported at 10.9 percent. Food inflation for December 2024 is expected to remain flattish on a YoY basis (+0.03 percent) which was 27.5 percent last year, with a MoM drop of 23bp. Sequential price decreases in food (35 percent weight) are expected to restrict YoY CPI growth. The stable trend in global oil prices helped keep POL product prices firm, hence Transport Index (6 percent weight) is expected to slightly increase by 30bps MoM this month. Despite a recent 200bps cut in Policy Rate during this month taking cumulative cut in the last 6 months to 900bps, the ongoing sharp disinflation maintains a high real interest rate (RIR) level. Dec-2024 expected CPI reading takes RIR to ~9ppt. On normalized CPI levels of c. 10 percent, expected in the long run, RIR at the current Policy Rate stands at 3ppt. This trend of declining inflation strengthens the Monetary Policy Committee’s case for continuing the easing cycle in its next meeting. For the remainder of FY25, inflation will likely remain on the low side until May 2025