Ayesha Saba

While the decline in inflation brings short-term relief, the government must adopt a careful balancing act between managing inflation, stimulating growth, and addressing fiscal imbalances if it i

s to meet the desired targets and avoid a potential economic setback in the coming months, opined Sajid Amin, eminent economist and Deputy Executive Director at the Sustainable Development Policy Institute (SDPI), while talking to WealthPK. He said in a surprising turn of events, Pakistan’s Consumer Price Index (CPI) inflation fell sharply to 6.93% year-on-year, far surpassing the market expectations. This marks a significant milestone, as inflation has been a pressing concern for the economy, impacting the consumer purchasing power and business operations. The improvement was attributed to various factors, including an enhanced supply situation, relief from imported inflationary pressures and influence of a high-base effect. “One of the primary reasons behind this substantial decline is the higher base effect.

The inflation rates from last year were exceptionally high, setting a base that makes this year’s figures appear lower in comparison. In simple terms, inflation is measured year-on-year, and since the prices during the same period last year were inflated, it creates an illusion of a steeper drop when the current prices are compared to them,” he explained. Despite these positive developments, Amin raised concerns about sustainability of the declining inflation trend. He argued that while the current figures may reflect short-term improvements, several underlying issues can reverse this progress if not addressed promptly. The SBP’s recent decision to cut interest rates aims to support economic recovery, but there is some fear that this could ignite inflationary pressures once again. He cautioned that inflation may rise again if the government resorts to excessive borrowing from the central bank to cover its fiscal deficit.

“The government needs to implement structural reforms rather than relying on temporary measures. Without addressing the underlying fiscal imbalances, we may see inflation bounce back next year, undermining the progress made,” he warned. Pakistan’s headline inflation rate fell to 6.9 percent year-on-year in September 2024, marking a significant decrease from August’s 9.6 percent and remaining in the single-digit territory for the second month in a row, according to the data from the Pakistan Bureau of Statistics (PBS). On a month-on-month basis, the Consumer Price Index (CPI) fell by 0.5 percent in September 2024 compared to an increase of 0.4 percent in the previous month and an increase of 2.0 percent in September 2023.

Credit: INP-WealthPk