In a historically significant economic development, short-term inflation in Pakistan, as determined by the Sensitive Price Index (SPI), has been negative for the first time in the past seven years. The SPI, which had deflation of 0.8% on a year-on-year basis for the week ending February 28, 2025, showed a decrease in inflationary trends that had become quite flattening for the last few years.

Many reasons contributed to this unexpected deflation that was not anticipated in the market, such as the fact that the State Bank of Pakistan’s (SBP) monetary policies, fiscal reforms executed under the IMF program, and decreasing food prices were the causes. The SBP has enforced considerable interest rate cuts, as it managed to lower the key policy rate to an amazing level of 12% after it had peaked at 22% in June 2024. This was done to divide the economic activity and check the inflation. Apart from economic policy measures, the IMF’s sponsoring of the $ 7 billion loans paired with positive shocks (e.g. fiscal rigidity, structured reforms) have been one of the primary things to contribute to economic recovery. The decrease in food costs, particularly vegetables, and oils, which are edible, has been the other hand to take the edge off inflationary conditions.

Pakistan Short-Term Inflation Implications for the Economy

Despite deflation being caused by the decline of the price of goods and thereby consumer gains in purchasing power, deflation at the same time involves the risk of bringing about some economic problems. Long-term deflation may lead to the reduction of business revenues, underinvestment in the economy, and loss of jobs. The government and SBP authorities may need to carefully oversee both policies to prevent the economy from slowing down and, at the same time, to keep the price level under the price stability. Besides that, another dimension of the issue is the increase in the real cost of debt, which is a matter of worry for public and private borrowers alike.

This development is a very important one for the economy of Pakistan and reflects the results of recent political measures. Specialists prescribe continuous monitoring of inflation development in the upcoming three months to avoid the economic growth from being stunted due to deflation.