In the past five years, Pakistan has seen significant fluctuations in inflation rates, impacting the country's financial stability and the living conditions of its citizens. But, this year, the country's Consumer Price Index or CPI witnessed a significant increase with a negative effect on the industry and households alike.

Let’s explore the various facts and figures related to inflation in Pakistan from 2019 to 2023, with a focus on the high cost of everyday food and grocery for a regular household.

In a Nutshell

• Effects of Inflation on Households
• Facts and Figures about Inflation
• Reasons Behind Inflation
• How to Beat Inflation
• FAQs

Negative Effects of Inflation in Pakistan on Households

Inflation is a critical economic indicator that influences purchasing power, cost of living, and overall economic growth. Despite the government's efforts to maintain stable inflation rates, Pakistan has experienced a notable increase in inflation since 2019.

Inflation happens when prices go up and your money is not worth as much as it used to be. In other words, your money loses purchasing power. The Consumer Price Index (CPI) in Pakistan increased to a 50-year high of 35.37% in March 2023. To give you an overview of the inflation in Pakistan, let’s break down the monthly household expenditure on essential commodities.

A comparison of everyday grocery and petrol prices in Pakistan from 2019 to 2023 for an average household

As evident from the aforementioned table, in 2019, Rs. 10,000 would get you all the necessities such as petrol, sugar, eggs, flour and other essentials. In 2023, you need Rs.26,000 or more to get the same amount of groceries and fuel. The inflation rate in Pakistan has increased by 160% in the last five years which reflects a reduction in the purchasing power of households.

Facts and Figures Related to Inflation in Pakistan from 2019 to 2023

According to the Pakistan Bureau of Statistics, the Weekly Sensitive Price Indicator (SPI) for the week ended on 19-04-2023 was 251.83, with a 0.51% change over the previous week. The Cost of food in Pakistan increased by 47.15% in March 2023 over the same month in the previous year. The Consumer Price Index (CPI) increased up to 3.72% (month on month) from 211.28 points in February 2023 to 219.14 points in March 2023.

Food inflation in Pakistan averaged 9.21% from 2011 to 2023, with a 47.15% increase in March 2023 compared to the same month in the previous year

In simple terms, the cost of living in Pakistan has been on the rise over the past few years. In 2019, the yearly inflation rate was 10.34%, which means that prices for goods and services were increasing. The inflation rate dropped slightly to 8.59% in 2020 but rose again in 2021, reaching 9.30%.

The trend continued into 2022, with the annual inflation rate climbing further to 10.96%. These figures indicate that the prices of everyday items in Pakistan have been steadily going up, making life more expensive for its residents.

Reasons behind Inflation in Pakistan

There are countless reasons at play that have led to accelerated inflation in Pakistan. Delays in much-needed monetary assistance from the IMF to the global recession and other factors have led to an exuberant increase in the cost of goods in Pakistan for households.

IMF Tranche Delay and Default Risk

The delay in the release of the International Monetary Fund (IMF) tranche has led to inflation in Pakistan. The IMF had demanded that Pakistan return to a market-based exchange rate and higher fuel prices, measures that Pakistan recently implemented and that have already sent inflation to a record high.

The delay in the disbursement of the next tranche of $1 billion from the IMF has put pressure on the Pakistani rupee, which has hit a record low. The IMF's structural reforms in the economy have become a bone of contention between the Pakistani government and the IMF, Saudi Arabia, and the United Arab Emirates.

The delay in the release of the IMF's tranche has led to a shortage of foreign exchange reserves, which has led to a higher demand for dollars and a subsequent decline in the Pakistani rupee, which has further exacerbated inflation in the country.

Increment in Currency Circulation

In Pakistan, currency circulation has been rising over the years, with the State Bank of Pakistan reporting that it reached Rs. 7.4 trillion (approximately $47.5 billion USD) by the year-end 2022. The increase in currency circulation can contribute to inflation in the country, as it affects the overall money supply and the purchasing power of the Pakistani Rupee.

Dollarisation Practices

Due to the depreciation of the Pakistani Rupee recently, individuals and businesses have started using foreign currencies, such as US dollars, for transactions and savings leading to a higher demand for the already depleting USD reserves. This practice, known as dollarisation and has significantly reduced the demand for Rupee but extended the demand for USD and other currencies.

Consequently, the exchange rate weakens, leading to higher import costs and inflation.

Increase in Commodity Prices Globally

Another reason behind inflation in Pakistan is the rise in international commodity prices. For instance, Pakistan imports a majority of its crude oil, and when the international price of crude oil rises, it creates pressure on all the industries that use it as a raw material.

An increase in oil prices indicates expensive transportation costs for goods and people, higher energy prices, and an increase in the cost of production of goods and services.

Beat Inflation with the Right Investment

Inflation can be a significant concern for investors and individuals. But there are ways to safeguard against the harmful effects of inflation in Pakistan. But one way to protect your hard-earned money from its eroding effects is by investing in the right stocks within the KSE 100 Index. Despite the dismal political and economic situation in the country, the index has outperformed fixed-income schemes by banks over a huge margin.

The KSE 100 Index comprises the top 100 companies listed on the Pakistan Stock Exchange (PSX) and serves as a benchmark for the overall market performance. To beat inflation, focus on selecting stocks and mutual funds with a solid history of earnings growth, strong market position, and a stable dividend yield.

There are several growth-based and dividend-paying stocks that you could invest in. This will not only provide a hedge against inflation but also offer an opportunity for capital appreciation. Understanding the Fundamentals of Capital Markets can help you pick the right investment opportunities.

Additionally, diversify your portfolio by investing in different sectors, such as fast-moving consumer goods (FMCG), pharmaceuticals, energy, and technology, to minimize risks and maximize returns. Keep a close eye on economic indicators, monetary policies, and global trends that may impact the performance of these stocks. By strategically investing in the right stocks within the KSE 100 Index, you can potentially secure your financial future and outpace the inflationary pressures in Pakistan.

FAQs

How does inflation impact the stock market in Pakistan?

Inflation can have a positive impact on the stock market in Pakistan, as investors may seek to invest in equities to hedge against inflation. However, inflation can also lead to an increase in interest rates, which can negatively impact the stock market. However, despite the underperformance, KSE 100 Index has given significantly more return on investment when compared with profit rates in savings accounts in banks or other fixed-income certificates. The higher interest rate makes the banking sector one of the best sectors for investment.

How does inflation impact the exchange rate of the Pakistani Rupee?

Inflation negatively impacts the Rupee’s exchange rate. The depreciation in the exchange rate of the Pakistani currency consequently leads to a decrease in purchasing power and demand for the currency.

In conclusion, the negative effects of inflation in Pakistan are far-reaching, impacting not only the overall economy but also the daily lives of individuals and households. The diminished purchasing power caused by inflation can significantly reduce household spending, leading to a low standard of living and increased poverty rates.

Given these challenges, it's crucial for individuals to find ways to secure their financial future during turbulent times and find ways to generate passive income in Pakistan. And one of the best ways to passive income is to trade stocks and commodities through Technical Analysis. If you’re new to the term, Sarmaaya Financials offers a comprehensive course Technical Analysis Masterclass to help you generate a steady stream of passive income.