Inflation eases, but prices stay high — here's why the relief isn't being felt

Inflation has eased, yet basic goods remain more expensive compared to two years ago, leaving consumers feeling the burden of higher living costs. The discrepancy between official inflation figures and the actual prices faced by individuals stems from the difference between headline inflation and the price level they experience.

Inflation measures the rate at which prices are changing, while the price level represents the actual cost of goods and services. The national average inflation figure may not accurately reflect the retail prices consumers pay in specific markets. Even though headline inflation has moderated in Pakistan, essential items like onions, electricity, diesel, and petrol continue to be significantly more costly than they were in October 2024.

For instance, the price of a 20kg bag of wheat flour rose by 47%, while a 2.5kg tin of vegetable ghee increased by 18.5%. In contrast, petrol prices surged by 56.9%, and high-speed diesel climbed by 59.5%. Dr. Ashfaq Hasan Khan, a former economic adviser, attributes these price hikes mainly to global energy costs and domestic food prices, particularly wheat.

While higher global energy prices are a worldwide issue, Pakistan's petroleum levy exacerbates the problem. He contends that the root cause of inflation lies on the supply side, rather than being driven by excessive consumer demand. Consequently, traditional IMF recommendations like devaluing the currency and raising the policy rate may not effectively tackle the underlying causes of inflation.

Instead, Khan suggests that monetary policy should focus on addressing supply-side factors, such as energy costs and food prices, rather than solely targeting demand.