Pakistan Inflation Rebounds to 3.5% in May 2025: Normalisation or Warning Sign?

After Record Lows, Inflation Rebounds in May

Pakistan’s inflationary trajectory took a notable turn in May 2025 as headline inflation rose to 3.5% year-on-year, according to fresh data released by the Pakistan Bureau of Statistics (PBS). This marks a steep jump from April’s historic low of just 0.3%, suggesting the beginning of a possible price normalisation cycle after months of deflationary pressures driven by a high base effect.

Inflation Snapshot – May 2025

11MFY25 average CPI now stands at 4.61%, a dramatic fall from 24.52% over the same period last year.

What’s Driving the Rebound?

The slight uptick in May is largely attributed to the fading high base effect from 2023 — when inflation had peaked at a record 38% in May — coupled with a gradual recovery in demand, easing supply bottlenecks, and some return of pricing power in core sectors.

Additionally, seasonal adjustments and exchange rate stability have helped contain any runaway spikes, although food and energy volatility remains a concern.

Monetary Policy: Has the SBP Moved Too Quickly?

Just last month, the State Bank of Pakistan (SBP) cut its benchmark policy rate by 100bps to 11%, citing sustained disinflation and room to support economic activity.

Since June 2023, the central bank has cut the interest rate by 1,100bps — a monumental policy shift following an extended period of record-high rates (22%).

With inflation now rising again — and potentially climbing further in June — this poses two key risks:

1. Premature easing could fuel price instability

2. Limited future rate-cut flexibility if inflation rebounds faster than anticipated

Government and Market Expectations Were Off

The Finance Ministry, in its May economic outlook, had forecast inflation to ease to 1.5%–2% — significantly underestimating the final reading.

Brokerage houses were more conservative but still fell short:

• JS Global: Projected 2.7% CPI

• Insight Securities: Projected 3.4% CPI

This mismatch highlights growing uncertainty in inflation forecasting models, especially in a post-crisis, low-base economic environment.

Urban vs. Rural Trends

Urban areas saw inflation rise to 3.5% YoY, up from 0.5% in April. Interestingly, monthly inflation in cities turned positive (0.1%), breaking a deflation streak.

Rural areas showed a similar annual trend (3.4% YoY) but continued to experience monthly deflation (-0.5%), signaling that price pressures are returning more strongly in urban centers, likely due to greater consumption recovery.

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So, What Comes Next?

With inflation now on a gradual upward path, the following implications are key:

• Policy Rate Outlook: The SBP is likely to pause rate cuts in the next Monetary Policy Committee (MPC) meeting and may signal a data-dependent approach going forward.

• Investor Sentiment: Fixed-income markets may price in the end of the rate-cutting cycle sooner than expected.

• Government Budgets: Fiscal assumptions for FY2025-26, especially in terms of inflation-linked revenue targets, may need recalibration.

• IMF Monitoring: The inflation rebound could become part of IMF programme reviews, particularly if it complicates monetary-fiscal coordination.

Conclusion: A Return to “Normal” Inflation?

In conclusion, Pakistan’s May CPI reading should be seen less as a warning signal and more as a pivot toward post-crisis normalisation. But while inflation has eased significantly since 2023, the current uptick signals the end of ultra-low inflation rather than the return of price stability.

To preserve economic momentum, policymakers must strike a delicate balance between supporting growth and guarding against a second inflationary wave.

Inflation has calmed — but the hard work isn’t over.