Affiliations: Research Department, State Bank of Pakistan, Karachi, Pakistan
Corresponding author: Muhammad Nadim Hanif, Research Department, State Bank of Pakistan, Karachi, Pakistan. E-mail: [email protected].
Note:  Any views expressed here are those of the authors and need not necessarily be associated with their employer.
Abstract: According to monetarists, inflation is always and everywhere a monetary phenomenon. It may, however, have supply side drivers; including global commodity prices. In order to have better understanding of inflation dynamics in a small open economy like Pakistan, we need some new sub-indices within CPI basket. In this paper, we have proposed and estimated new subgroup indices within CPI basket of Pakistan for monthly data from July 1991 to June 2018. These sub-indices include those for ‘services’ and ‘goods’ prices. Within goods group, we have further bifurcated the sub-indices for ‘tradable’ and ‘non-tradable’ goods prices. Tradable goods price index is further bifurcated into ‘food and energy’ and ‘non-food and non-energy’ tradable sub groups. On average, goods account for two thirds of our CPI basket and remaining one third belongs to services. Non-tradable goods and services comprises of three-fourths of overall consumer basket, while one-fourth are tradable goods. Share of tradable goods in CPI basket has increased over time. Inflation rate in tradable goods prices is volatile and lacks persistence whereas services prices are found relatively stable and highly persistent in Pakistan. Inflation in tradable goods basket is found to lead inflation in non-tradable prices.
Keywords: Index numbers, price level, inflation, tradable and nontradable goods