OVER the past few months, the rate at which the prices of goods and services in the country have risen has slowed significantly. Headline fell to a 44-month low of 6.9pc last month.

This decline, driven by a high-base effect from last year when annual inflation stood at 31.4pc, along with plunging global oil and commodity prices, a stable exchange rate, falling demand due to eroding real wages, and, last but not least, aggressive monetary tightening, exceeds the projections of the government and the market. Latest figures from the Pakistan Bureau of Statistics show that both sticky core inflation and the three-month average inflation rates, although higher than CPI inflation, have also fallen to single digits, signalling a substantial easing of inflationary pressures. The narrowing gap between the CPI and core inflation — which excludes energy and food prices —suggests a slowdown in imported inflation.

The improvement in the inflation outlook has already seen the State Bank slash borrowing costs by 450bps to 17.5pc since June. The latest CPI reading has created further room for a cut in interest rates in November and December. The government’s recent move to buy back its costly debt of Rs351bn maturing in December from the commercial banks at the much lower rate of 16pc compared to the 20pc-21pc at which it was originally sold, has deepened expectations of monetary easing earlier than anticipated. In fact, private businesses are already calling for an aggressive rate cut next month.

With inflation plunging below the target of 12pc for FY25, the next monetary policy session will test the State Bank’s resolve of treading cautiously since risks remain elevated because of tensions in the Middle East and the fragile economic recovery at home.

No doubt, the recent decline in global energy and commodity prices has helped the government reduce domestic oil, transport and wheat rates. However, prices of goods and services consumed by the people continue to rise even as the inflation rate falls below 7pc.

In other words, the cost of living is increasing, though perhaps not as rapidly as earlier, showing that even when the inflation rate decreases, the prices do not. This means there will be no let-up in the pain of middle-class people when it comes to grocery expenses, school fees, and hospital bills. This will persist unless there is a sustainable economic turnaround and a much faster increase in real incomes that outpaces inflation.

With the government facing rising public discontent because of poor economic conditions, the big worry is that it might be tempted to go overboard to appease the voters and try to stimulate faster growth through inflationary measures. Although chances of such an eventuality are low with the IMF breathing down its neck, it cannot be ruled out.

Published in Dawn, October 4th, 2024