By Azam Tariq

Pakistan’s inflation slowed sharply during the first half of fiscal year 2025-26 as lower global commodity prices, exchange-rate stability and easing energy costs helped bring average consumer inflation close to the central bank’s medium-term target range, according to the State Bank of Pakistan’s Half Year Report 2025-26.

The report said average National Consumer Price Index inflation declined to 5.2 per cent in H1-FY26 from 7.2 per cent in the corresponding period last year, reflecting a broad moderation in price pressures across key segments of the economy. The easing came after Pakistan experienced one of its most prolonged inflationary episodes in recent years.

The SBP attributed the slowdown mainly to lower energy inflation, relative stability in the exchange rate and softer international commodity prices. Downward adjustments in administered electricity tariffs and reforms in the power sector also contributed significantly to reducing inflationary pressures.

According to the report, energy inflation fell to a multi-year low during the review period as global oil prices remained subdued for much of H1-FY26. The favourable pass-through of lower international fuel costs helped ease transportation and utility-related expenses across the economy.

However, the central bank noted that the decline in domestic fuel prices was partially offset by higher petroleum levies and climate-related charges imposed by the government.

Despite the overall moderation in headline inflation, food prices remained a source of concern. The report said food inflation increased during H1-FY26 due to lower wheat production, flood-related supply disruptions and structural inefficiencies in agricultural commodity markets.

Wheat shortages and supply-chain disruptions caused by floods particularly affected rural and low-income households, where food expenditures account for a larger share of household budgets.

The SBP said the government’s ongoing wheat policy reforms are expected to enhance market efficiency and improve price discovery over the medium term, helping reduce future distortions in food inflation dynamics.

Core inflation, which excludes volatile food and energy prices, also eased compared with last year but remained elevated. Persistent pressures continued to stem from house rents, education fees, gold prices and minimum wage adjustments.

The report additionally noted that some firms maintained higher profit margins despite declining input costs, contributing to sustained inflation in certain non-food sectors.

Although inflation outcomes improved considerably, the SBP maintained a cautious monetary policy stance during most of H1-FY26 because of lingering uncertainty surrounding global commodity markets, climate-related supply shocks and geopolitical tensions.

The Monetary Policy Committee kept the policy rate unchanged during July-October 2025 before reducing it by 50 basis points in December 2025 after the inflation outlook improved more than initially expected. The cumulative reduction since June 2024 reached 1,150 basis points.

The central bank said inflation expectations remained broadly anchored during the review period, supported by prudent monetary management and improving macroeconomic stability.

However, the report warned that risks to the inflation outlook have increased sharply since February 2026 following the outbreak of the war in the Middle East. The conflict has triggered a surge in international oil prices and heightened uncertainty in global commodity markets.

The SBP cautioned that higher oil prices could generate second-round inflationary effects through increased transportation costs, higher industrial input prices and rising inflation expectations.

According to the report, national CPI inflation is now expected to remain above the upper bound of the medium-term target range of 5 to 7 per cent during the remaining months of FY26 and into FY27.

The government has already started passing on part of the increase in international oil prices to domestic consumers, though it initially absorbed a significant portion of the shock through fiscal measures.

The report said rising freight charges, insurance costs and supply-chain disruptions linked to geopolitical tensions could further complicate the inflation outlook in the coming quarters.

Economists say Pakistan’s recent disinflation trend marks an important milestone in the country’s stabilisation process after years of severe price instability. Lower inflation has helped improve consumer confidence, reduce borrowing costs and support recovery in domestic demand.

At the same time, analysts cautioned that sustaining low inflation would remain challenging because Pakistan remains highly vulnerable to imported inflation, particularly through energy prices and food supply shocks.

The SBP stressed that maintaining macroeconomic stability would require continued policy discipline, prudent monetary management and structural reforms aimed at improving agricultural productivity, energy efficiency and supply-chain resilience.

The report added that inflation control remains critical for sustaining economic recovery, preserving purchasing power and supporting long-term investment and business confidence in the economy.

Credit: INP-WealthPk