The year 2025 was a period of much-needed calm for Pakistan’s economy, as inflation finally eased after consecutive years of double-digit blows. The outgoing year marked a period of remarkable disinflation, but also highlighted the ongoing challenges of cost of living and economic management. According to Arif Habib Limited, headline CPI averaged just 4.49% during FY25, a sharp cooldown from 23.4% in the previous year. “This remarkable disinflation was largely driven by tight monetary policy, reduced subsidies, disciplined fiscal management under the IMF [International Monetary Fund] programme, and a notable drop in imported inflation as global commodity prices softened,” the brokerage house said in its latest report titled Pakistan Strategy 2026 - The Equity Edge Continues. However, Amreen Soorani from Al-Meezan Investments explained that although inflation slowed, “the cost of living remained a challenge as an increase in wages did not catch up to the accumulated 50%+ price surge of the previous two years”. Prices continued to rise in Pakistan, albeit at a slower pace in 2025, “hence the year witnessed disinflation, not deflation, which is falling prices,” she said. Monthly inflation, as reported by the Pakistan Bureau of Statistics (PBS), showed that the first quarter of 2025 was quiet, with inflation recorded at 2.4% in January , 1.5% in February , and 0.7% in March , reflecting the impact of strong base effects and soft global commodity prices. By April, inflation further eased to just 0.3% , making the early part of the year one of the lowest in recent history. However, the inflation rate picked up pace in the second quarter, with May at 3.5% and June at 3.2% , as seasonal adjustments and higher demand began to influence prices. July saw a sharper rise to 4.1% , followed by a slight moderation in August at 3% . The latter part of the year observed a more significant hike, amid an uptick in food prices and seasonal supply-side shocks, with inflation jumping to 5.6% in September , 6.2% in October , and 6.1% in November . This overall trend displayed how low base effects early in the year kept the headline inflation rate subdued, while supply disruptions, floods, and seasonal factors contributed to a gradual increase in the second half of 2025. The State Bank of Pakistan (SBP) responded by easing the policy rate, cutting it cumulatively by 1,150 basis points from its peak at 22%, bringing it down to 10.5% by year-end. “The pace was largely seen as appropriate, though cautious. Some critics argued the cuts were too slow given the high real positive rates, stifling industrial growth,” said Soorani. “However, the SBP maintained a buffer to guard against volatile energy prices and other changes in the global trade landscape,” she added. Market sentiment, notes Waqas Ghani, Head of Research at JS Global, remains divided, but expectations for further easing persist. “We see scope for only one more 50bp cut, with the policy rate expected to bottom out at around 10%.” Food and core inflation Seasonal floods impacted output and logistics, pushing food inflation up to 5.5% month-on-month in September. “But the impact proved significantly milder and shorter-lived than expected as November even recorded a decline of 0.2% MoM in the food index, signalling a return to stability,” read the AHL report. “For the remainder of FY26e, food inflation is expected to average only 0.4% per month, even after accounting for typical seasonal swings such as Ramadan. This provides a crucial buffer against broader price pressures, especially in a country where food carries heavy weight in the consumption basket,” it added. Core inflation, excluding food and energy, has also remained steady, projected at 7.44% for FY26, with a similar trend expected into FY27. “This indicates that despite the rebound in headline CPI, fundamental inflationary pressures remain contained.” Outlook for FY26 and FY27 With the low base of 2025, inflation is expected to normalise upwards, with FY26 headline inflation projected around 6.9%, says analysts, comfortably within the SBP’s medium-term target of 5–7%. For FY27, inflation is expected to drift gently upward to around 8%. “This mild upward drift reflects the continued normalization of economic conditions rather than any significant deterioration,” said AHL. Risks include exchange-rate volatility, global commodity price swings, renewed energy tariff adjustments, or supply disruptions. “Going forward, floods and heavy rainfall could disrupt agricultural supply, adding to inflation risks. Volatility in energy prices stemming from global commodity fluctuations or domestic subsidy and pass-through adjustments may raise transportation and manufacturing costs. Meanwhile, exchange-rate instability could amplify import-cost inflation, particularly if disruptions along the Afghan border persist and constrain trade flows,” says Ghani, JS Global Head of Research. “There is a need to continue strengthening external and fiscal buffers to absorb potential shocks and support the economic recovery, while maintaining coordinated monetary and fiscal policies and advancing structural reforms to ensure sustainable growth,” added Ghani. 2025 was a year of relief for Pakistanis, with disinflationary trends providing breathing room and anchoring inflation expectations. “Our current account expectation for this year is a $1.4–1.6 billion deficit, and next year it will be around $2.8 billion, which is still a manageable level,” says Sana Tawfik, Head of Research at AHL. “Reserves are building up, with the State Bank’s target at $17 billion by June 2026, so there is no concern on parity,” she added. Yet, the cost of living remains high in Pakistan, and the economy continues to face seasonal and external shocks. Careful policy management will be needed to keep inflation under control while supporting growth in 2026 and beyond.