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Inflation Bomb

The government should reduce its expenditures on non-essential sectors and broaden the tax net and collection.

By Asif Javed | February 2025

Inflation Bomb
Pakistan has recently experienced the worst inflationary trend due to a weak economic situation, global factors, and fluctuating exchange rates. An all-time high CPI value was observed in May 2023, reaching 38%. This peak level significantly affected households and businesses, as it became difficult for ordinary people to bear basic living expenses. In contrast, businesses had to pay more for their input. Workers were finding it difficult to meet their expenditures with higher prices, and the demand for wages increased, increasing business costs.

The Consumer Price Index (CPI) decreased to 4.1% in December 2024 on a year-on-year basis, while the rate was 29.7% in December 2023. Urban inflation was 4.4% in December 2024 compared to 30.9% in December 2023, and rural inflation was 3.6% compared to 30.9% in December 2023. Based on favourable economic conditions, the CPI is expected to continue the downtrend in January 2025 and for the next few months.

However, the United Nations (UN) report on Pakistan’s economy projected that inflationary pressure has decreased, which allowed the State Bank of Pakistan (SBP) to cut policy rates in 2024. The report projected that the inflation rate in Pakistan would likely be in double digits in 2025 and decrease to 8.3% in 2026. Considering the poverty rate in Pakistan, where millions of people live below the poverty line, inflation causes significant challenges for ordinary people.

One key reason for this hike in inflation was fluctuating exchange rates. The government kept the rupee high against the dollar, and the relaxation in this policy opened the floodgates when the dollar went from Rs. 230 to Rs. 270 in just a few days. This escalated overall prices and affected the economy, and the inflationary trend started. Pakistan is an import-oriented consumption economy where any fluctuation in the exchange rate generates an inflationary trend.

Pakistan’s worst inflation was observed in four months, from February 2023 to May 2023. Loose monetary policy and a rise in global oil and food prices due to the Ukraine war were other reasons for Pakistan’s inflationary trend during this period.

The State Bank of Pakistan (SBP) intervened and raised interest rates in June 2023 to an all-time high of 22%. Inflation started decreasing based on making borrowing more expensive and refraining from spending. SBP cut interest rates in June 2024, the first rate cut in four years. The basis of this rate cut was the ease in inflationary pressure in May 2024 and the preceding few months.


Macroeconomic stabilization during the last few months has eased the country’s inflationary pressure. Tight monetary policy and a decrease in global oil prices also slowed the inflationary trend.
Every year, prices of food items, including pulses, tomatoes, potatoes, fish, meat, milk powder, fresh milk, butter, fresh fruits, fresh vegetables, and vegetable ghee, increased in December 2024 compared to December 2023. This reflects an increase in the prices of major food items, which caused an increase in expenditures on food.

In non-food items, footwear, readymade garments, medicines, communication services, and water supply were among the major items whose prices rose in December 2024 compared to December 2023.
The key point is that a decrease in inflation does not necessarily reflect a price decline. It demonstrates that the rate at which prices increased slowed compared to last year. Ordinary people are still pay higher prices with the same income level.

The government should implement export-leading growth measures to promote economic activities in the country. Under the ‘Uraan Pakistan’ programme, the government has targeted boosting exports to $100 billion, ensuring long-term economic stability. Currency stabilization will help to overcome the trade deficit and decrease imported inflation. The exchange rate’s stability will help minimize speculative activities and fluctuations that affect trade, domestic businesses, and the overall price level.

The IMF programme helped ease the pressure on the economy, which promoted economic stability. Going forward, the government should reduce its expenditure on non-essential sectors and broaden the tax net and its collection to minimize fiscal deficits. Cash transfers to vulnerable groups can help these families meet their basic needs. The State Bank of Pakistan should implement a restrictive monetary policy to curtail the demand-side inflationary trend.

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