Do Food Prices Affect Non-Food Prices? A New Dimension of Inflation Transmission in Pakistan

Abstract

The study has attempted to see a new aspect of inflation in Pakistan, i.e. an understanding of the effect of food prices on non-food prices. For the purpose, the annual time-series data for the years 1970 to 2014 are used to determine the Granger causality between food prices and non-food prices. The results show that the food price index has a positive effect on the non-food price index and the causality is from the food price index to the non-food price index. The relationship between the index of food prices and the index of non-food prices is stable over time. The results suggest that any attempt to control inflation, one dimension of the anti-inflationary policy should be the special care of food items to restrict their price rise through the supply of food by domestic production or imports.