Inflation soaring

Inflation has surged in Pakistan, with the Consumer Price Index (CPI) reaching 11.1 percent in August, up 1.9 percent from July's estimate of 9.2 percent. This increase mirrors the June rate, while it's 0.6 percent lower than May's CPI and 0.2 percent higher than April's. Compared to the previous year's July-August period, the rise in CPI for the first two months of the current fiscal year is significant: 3.56 percent in 2025 versus 10.17 percent in 2026.

The primary driver of these high CPI rates is the Middle East crisis, which continues to impede the supply of petroleum and various products, including diesel, aviation fuel, fertilizers, and helium. However, imports to the Gulf region are being delivered by air, a more costly method than shipping. Despite the Wholesale Price Index (WPI) dropping to negative 0.74 percent between July and August 2025, indicating a decline in wholesale prices, the CPI remained positive for the same period.

Experts urge the country's economic leaders to address four key factors contributing to the discrepancy: the inclusion of the services sector, the role of middlemen, the delay in price adjustments down the supply chain, and the difference between WPI and CPI. The services sector, which includes doctors, hospitals, and education fees, is incorporated in the CPI but not in the WPI.

Middlemen operate across various sectors, including agriculture, and often secure windfall profits. Wholesale price changes take time to filter through the supply chain, but in Pakistan, regulated prices are adjusted immediately, while downward adjustments face resistance. Additionally, the WPI focuses on industrial inputs like raw materials and fuel, which have risen since 2019 due to International Monetary Fund conditions, while the CPI covers consumer prices.

Pakistan's informal sector, estimated to account for nearly 50 percent of the legal economy, also plays a role in inflation. Prices in this sector are determined by traders' perceptions of clients' ability to pay, leading to higher charges for customers in expensive vehicles compared to those on bicycles. Despite calls by successive governments to integrate the informal sector into the tax system, this remains a contentious issue.

Chartered accountants warn that the recently launched Tax Asaan mobile and web application could be misused, suggesting that the government should instead focus on structural tax reforms and reduce reliance on indirect taxes, which currently account for about 70 percent of all direct tax collections.

The government must also examine components of its revenue, including the petroleum levy, to alleviate inflationary pressure on vulnerable and lower-to-middle-income earners. According to the World Bank, the percentage of Pakistanis living below the poverty line has reached a concerning 42.4 percent.