Pakistan Economy – May 2025: Inflation Rises to 3.04% YoY Amid Continued Disinflation

May 2025 Inflation Update: Headline CPI Rises to 3.04% YoY, But Disinflation Continues

Pakistan’s headline inflation for May 2025 is projected at 3.04% year-over-year (YoY)—a noticeable uptick from the record-low 0.3% YoY in April 2025, yet significantly lower than the 11.8% YoY rate observed in May 2024. This moderation continues to reflect a combination of high base effects, easing food and energy prices, and currency stability.

Despite the marginal increase, Pakistan’s inflationary environment remains notably subdued compared to the previous fiscal year, offering breathing room for both policymakers and households alike.

Disinflation Trend Holds: Key Drivers Behind the Numbers

Core Inflation (NFNE) Remains Sticky at 8.3% YoY

The Non-Food, Non-Energy (NFNE) core inflation—often viewed as a better measure of underlying price trends—continues to show persistence. For May 2025, it stands at 8.3% YoY, slightly down from previous months but still elevated relative to headline CPI.

Over the first 11 months of FY25 (11MFY25), average core inflation is recorded at 9.92%, indicating sticky services inflation and wage-driven costs.

Average Headline Inflation (11MFY25): 4.70%

The 11MFY25 average headline inflation is now estimated at 4.70%, a dramatic decline from 24.91% in the same period last year. The disinflation is primarily attributable to:

• Base effects from last year’s commodity price shocks

• Softening food prices due to domestic supply stability

• Declining transport index, supported by lower global oil prices

May 2025 Monthly Trends (MoM): Food, Transport, and Housing Down

Despite the YoY uptick, the month-on-month (MoM) inflation for May 2025 is expected to decline by 0.6%, reinforcing the downward trend in prices. Here’s a breakdown of the key components:

Food Inflation: -1.8% MoM | +1.3% YoY

• Notable MoM declines in wheat, vegetables, cooking oil, and pulses

• Stable supply chains and low global food prices contributed to the drop

• However, the YoY rise is modest, reflecting post-Ramzan adjustments and seasonal effects

Housing Index: -0.7% MoM

• Led by reduced electricity tariffs under the Quarterly Tariff Adjustment (QTA) mechanism

• Slower rent inflation has also played a role

Transport Index: -0.8% MoM

• Driven by a downward revision in petroleum product prices

• Lower international oil benchmarks have trickled down into domestic retail rates

Forward Guidance: What to Expect for the Remainder of 2025

The outlook for inflation remains benign, contingent upon three key assumptions:

1. Stable food prices, with continued government monitoring of agricultural supply chains

2. Global energy and commodity prices remaining soft or flat

3. A stable PKR, supported by rising reserves and controlled external financing needs

If these conditions hold, Pakistan is likely to end FY25 with full-year inflation between 4.5% and 5.0%, a dramatic improvement over the prior fiscal year and a key enabler for monetary easing going into FY26.

Implications for Policy and Markets

The disinflation trend strengthens the case for:

• Monetary easing by the State Bank of Pakistan (SBP) to support growth

• Lower cost of capital for businesses and startups

• Improved real wage growth, particularly for middle-income households

• Enhanced fiscal stability, as subsidies and interest costs decline

This environment also favors capital markets, with reduced inflation risk premiums making equities and bonds more attractive.

Conclusion:
While headline inflation has edged up in May 2025, the broader trend remains decisively disinflationary. Pakistan is now entering a rare phase of price stability, laying the groundwork for sustainable economic recovery. With core inflation expected to follow headline CPI in the coming months, fiscal and monetary authorities may soon find space to pivot toward growth-focused policies—a much-needed shift after years of macroeconomic firefighting.