Pakistan’s headline inflation rose to 3.5% year-on-year in May 2025, according to data released by the Pakistan Bureau of Statistics (PBS) on Monday. This marks a significant jump from April’s reading of just 0.3%, and comes in higher than both government and market expectations.

On a month-on-month basis, inflation actually edged down by 0.2% in May, following a 0.8% decrease in April and a 3.2% drop in May 2024. For the first eleven months of the current fiscal year (11MFY25), average CPI inflation stood at 4.61%, a dramatic improvement from the 24.52% recorded during the same period last year.

Inflation has been a persistent challenge for Pakistan’s economy, with the country recording a record-high CPI inflation rate of 38% in May 2023. Since then, inflation has steadily declined, aided by a series of interest rate cuts by the State Bank of Pakistan (SBP). Last month, the SBP’s Monetary Policy Committee slashed the key policy rate by 100 basis points to 11%—the lowest since March 2022. In total, the central bank has reduced rates by 1,100 basis points since June, down from an all-time high of 22%.

Despite these efforts, May’s inflation reading exceeded the Finance Ministry’s forecast, which had anticipated a year-on-year rate of 1.5% to 2% for the month, with a slight uptick expected in June. The ministry remains optimistic about the broader economic outlook, citing continued growth in exports and remittances as factors likely to keep the current account deficit in check.

Brokerage houses were also caught off guard by the higher-than-expected inflation. JS Global had projected a 2.7% CPI reading for May, while Insight Securities forecasted 3.4%. Both firms noted that the fading base effect was likely to normalize price trends, with JS Global estimating average inflation for 11MFY25 at 4.7%, down sharply from 24.9% in the previous year.

Breaking down the data, urban inflation climbed to 3.5% year-on-year in May, up from 0.5% in April and 14.3% in May 2024. On a monthly basis, urban inflation inched up by 0.1%. Rural inflation also increased, reaching 3.4% year-on-year in May, compared to a 0.1% decrease in April and 8.2% in May 2024. Month-on-month, rural inflation fell by 0.5%.