Inflation cools, risks remain

Headline inflation is back in single digits after crossing 10 percent in all three months of the previous quarter. CPI was recorded at 9. 2 percent in July 2026, compared to 11. 1 percent in the previous month. Although headline inflation eased somewhat, the reading was higher than analysts’ expectations, as the month-on-month increase stood at 1. 2 percent despite the reversal in energy prices. The main culprits were food—particularly tomatoes and wheat—along with an abnormal increase in the communication sub-index and a sharp upward revision in motor vehicle taxes. Going forward, inflation may touch double digits again over the next two months and is likely to hover between 9. 5 and 10. 5 percent. Given this outlook, along with uncertainty over oil prices due to the ongoing US-Iran war, anyone expecting a rate cut in September should take a back seat. The food price sub-index rose by 4. 2 percent month-on-month in July, taking the year-on-year increase to 10. 6 percent. Both perishable and non-perishable food prices increased, rising by 17. 7 percent and 2. 3 percent month-on-month, respectively. The former was driven by an exceptional rise in tomato prices, with urban prices increasing by 117 percent month-on-month, followed by fresh vegetables at 22 percent. Prices of perishable food items may begin to reverse due to the usual cyclical demand-and-supply dynamics. The growing concern, however, is the sharp increase in wheat prices. In urban areas, wheat prices rose by 7. 4 percent month-on-month, while the year-on-year increase stood at a staggering 72 percent. The Punjab government is blaming private-sector hoarders for the spike. However, it should take responsibility for prematurely releasing its own stocks. During the harvest season, the Punjab government unnecessarily released wheat stocks to further lower roti prices—something similar was done by the federal government through imports in the previous season. Now, the chickens are coming home to roost. The outcome was expected and had already been highlighted in this section. The government temporarily achieved its objective of lowering prices, but at the cost of farmers’ incomes, which adversely affected the broader economic recovery. Prices are now rising again, while farmers’ agony persists. That is what happens when the government introduces reforms with one hand—such as doing away with the support price—but pursues conflicting policies to control the market with the other. That is the story of wheat, and it is now contributing to higher inflation. The government is considering imports at a time when international prices are also under upward pressure. Let us see where wheat prices eventually settle. The good news is that the harvest was strong. One of the highest month-on-month increases among non-food items was recorded in motor vehicle taxes, as the government significantly raised the cost of keeping cars on the road. The index rose by 39 percent month-on-month, diluting the decline in the transportation sub-index, which fell by 5. 7 percent following an 8. 7 percent reduction in motor fuel prices. The overall transportation index is still up by 15 percent year-on-year, and upward pressure is likely to continue as fuel prices gradually move higher. The good news is the lower housing and utilities index, which declined by 0. 7 percent month-on-month, thanks to a negative adjustment in electricity charges. Its year-on-year increase was restricted to 7. 1 percent. Core inflation remained largely unchanged from the previous month, standing at 8. 6 percent in urban areas and 8. 1 percent in rural areas. However, there was some acceleration on a monthly basis, with urban and rural core inflation increasing by 0. 7 percent and 0. 9 percent, respectively, compared to almost no change in the previous month. Both the Sensitive Price Index and the Wholesale Price Index remained elevated. However, both have declined from their peaks over the past couple of months and currently stand at 11. 5 percent and 9. 5 percent, respectively. Going forward, the inflation outlook will depend on movements in international oil and petroleum product prices. If they remain elevated, inflationary pressures may resurface and could produce second-round effects. However, if prices decline—or remain at current levels—overall inflation may ease closer to the SBP’s medium-term target during the second half of FY27.

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