Macroeconomic Drivers of Food Inflation in Pakistan: The Role of Energy Prices, Exchange Rate, and Compound Shocks

Abstract

The study examines the effects of energy prices and exchange rate fluctuations on food inflation in Pakistan for the period 1990 to 2025. The study simultaneously models energy prices, exchange rate dynamics, and structural macroeconomic shocks as drivers of food price inflation. Also, accounts for agricultural output, trade openness, money supply, and foreign aid inflows using the Generalized Method of Moments (GMM) estimation framework. To reflect on the COVID-19 pandemic (2019-2021) and floods (2022-2025), two binary structural dummies are included. The results indicate that all the core variables have a statistically significant effect on food inflation. Foreign aid, agricultural growth, and trade openness have a negative impact, while the exchange rate, energy prices, and money supply have a significant positive impact. Both structural dummies have positive coefficients, indicating that structural changes in the crisis period positively affected food inflation. The findings indicate that food inflation in Pakistan is largely due to foreign macroeconomic factors, including import costs (cost channels) and the transmission of energy prices, rather than solely to food supply. The study adds to the empirical literature on price transmission mechanisms in Pakistan and offers policy implications for stabilizing food prices amid volatility in energy markets and currency pressures.