THE NEXUS BETWEEN OIL PRICE VOLATILITY AND FOOD INFLATION IN PAKISTAN: A DEMAND-SUPPLY DILEMMA

Received: 13.06.2021; Revised: 22.07.2021, Accepted: 05.09.2021, Published Online: 16.09.2021

Parvez Ahmed Shaikh

PhD Candidate and Assistant Professor in Economics, Department of Economics, Lasbela University of Agriculture, Water and Marine Sciences (LUAWMS), Uthal, Lasbela, Balochistan, Pakistan.

Manzoor Ahmed

Associate Professor of Economics, Department of Economics, Lasbela University of Agriculture, Water and Marine Sciences (LUAWMS), Uthal, Lasbela, Balochistan, Pakistan.

Khalid Khan

Associate Professor of Economics, Department of Economics, Lasbela University of Agriculture, Water and Marine Sciences (LUAWMS), Uthal, Lasbela, Balochistan, Pakistan.

Abstract:

The current study aims to examine the impact of international oil price volatility on aggregate food items prices (Inflation) in both the long-run and short-run demand and supply side factors. In Pakistan, however, inflation is mainly attached to oil prices and is generally referred to as a monetary phenomenon. The Quantity Theory of Money (QTM) has been proposed as the justification of a hypothesis for theoretical reasoning. To obtain empirical results, the ARDL model has been applied to the data set of monthly time series for the period from July-2001 to June-2019. The result of the study suggests that oil prices were found to be positive and statistically significant with immediate and up to 3-month lags on food inflation. However, empirical evidence supports that it is a short-run phenomenon in Pakistan. And on average 1% increase in oil price tends to increase food inflation 0.035% in short run. While inflation driven by the money supply (M2) is a long-run adjustment. On average 1% increase in M2 results in an increase in food inflation of 1.74%. While the 1% increase in interest rate (kibor rate) food inflation by 0.03%. Furthermore, the ITF (Inflation Targeting Framework) has proven to be ineffective in controlling food price hikes, rather than leading to rising food inflation. For policy recommendations, government must have strong administrative control, subsidy reforms, agriculture sector reforms, switching from non-renewable to renewable sources of energy, and monetary policy should be free from political interference.

Keywords: Oil Price Volatility (OPV), Inflation Targeting Framework (ITF), Food Inflation, Pakistan