Impact Of Raising Oil Prices On Inflation In Pakistan

This study is designed to examine the impact of hype in petroleum prices on inflation. The data used for the analysis is from 1975-2007 and it is collected from various economic surveys of Pakistan, world development indicator and IFS. All the variables are stationary on 1st difference, so we have used cointegration to have the impact of surge in oil prices on inflation. We use augmented dickey fuller test for stationarity. We found that oil prices have shows positive relationship with dependent variable inflation in long-run. Unemployment is significant and it shows negative relationship with dependent variable inflation in long-run. Exchange rates show it shows positive relationship with dependent variable inflation in long-run. Money supply is significant and it shows positive relationship with dependent variable inflation in long-run. The Central Bank should make tight monetary policy to keep the inflation low. The Central Bank can use expansionary monetary policy to try to offset the impact of oil prices on real output and employment. Pakistan is a country with population growing very fast; its energy resources are not increasing with the pace as its population is increasing.