“If the price of everything is going down, that’s going to include wages as well. People will have an incentive to sit on their cash and not spend it.” – Paul Krugman

Krugman’s quote instantly came to mind while reading recent headlines. Our Prime Minister regarded the recent disinflation on the completion of the government’s first year as “very good news”, and for the right reasons.

After all, the economy does seem to be stabilizing at first glance. Inflation has dropped to 1.5 percent, down from 38 percent in mid-2023. Interest rates still stand at 12 percent, and exports for the first eight months of FY25 have grown by 8.17 percent to US$ 22.02 billion. These numbers do testify to a stabilizing rupee and improved exports, all just in time to secure the much-awaited second $1 billion tranche from the IMF.

But as they say, the devil is in the details. While inflation is slowing, Pakistan treads on a bumpy economic road. High inflation persists in non-food sectors, such as housing, healthcare, and construction wages.

Exports declined by 5.5 percent to US$ 2.44 billion in February, widening the trade deficit by 33.43 percent to US$ 2.29 billion.

Furthermore, unemployment has increased from 4.5 million to 18.7 million, meaning that 22 percent of the workforce is now jobless. These figures indicate that stability is coming at the unbearable cost of stagnated growth.

This is the dark side of disinflation, as pointed out by neo-Keynesian economists. If prices are falling due to decreased spending, it is not a sign of economic strength but of stagnation. In Pakistan’s case, disinflation can be attributed to shrinking demand, rising costs, and policy uncertainty.

Although it is “very good news” that the prices of goods and commodities are falling, the unemployment........

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