Abstract:
This study assesses the impact of external shocks and exchange rate movements
on prices. The main benefit of this granular analysis is its ability to capture heterogeneous
impacts across different products and geographical areas, which is often overlooked in
macro-level studies. The model includes four global shocks: global inflation, US industrial
production, global food inflation, and global oil prices. Regarding domestic factors,
exchange rate, inflation expectations, and inflation persistence are considered. The
dependent variables are prices, including 356 items from the Urban Consumer Price Index
(CPI), 244 items from the Rural CPI, and 110 items from the Wholesale Price Index (WPI),
all measured monthly. The results show that global food prices have the most significant
influence on both national CPI and WPI inflation, while global oil prices have the least
impact on consumer and wholesale inflation in Pakistan. Domestically, the exchange rate
shows the highest pass-through effect on inflation, with inflation expectations and
persistence having comparatively lower impacts.
