Pass through effects of oil price on food and non-food prices in Pakistan: A nonlinear ARDL approach

• Published in: Resources policy 2020-12, Vol.69, p.101876, Article 101876
• Main Authors: Sarwar, Muhammad Nadeem, Hussain, Hamid, Maqbool, Muhammad Bilal
• Format: Article
• Language: English
• Subjects: Asymmetric effects; Autoregressive models; Causality; Commodity prices; Crude oil; Crude oil prices; Energy prices; Food; Food inflation; Food prices; Imports; Inflation; Market structure; Markets; NARDL; Non-food inflation; Oil price fluctuations; Pass-through; Petroleum products; Pricing; Transport costs; Welfare
• ISSN: 0301-4207; 1873-7641
• DOI: 10.1016/j.resourpol.2020.101876

Petroleum products constitute major share of Pakistan's imports. A change in crude oil prices affects energy prices and thus manufacturing and transportation cost. All these factors result in influencing the prices of goods and services which ultimately affect the welfare level of masses. Keeping in view, the market structure at international and local level, present study examines the pass-through effect of crude oil prices on food and non-food prices in Pakistan using nonlinear and asymmetric autoregressive distributive lag (NARDL) model and causality tests for 1990Q3 to 2019Q4 period. Results show that oil prices effect both food and non-food inflation, but effect is more pronounced in non-food inflation. It is also found that the impact is asymmetric, that is, effect is positive and significant only when oil price increase. Results of this study confirm the role of market power in commodity prices in Pakistan and call for effective regulatory policies. •This is the first study on the asymmetric relationship between oil prices and food and non-food prices in Pakistan.•We believe these asymmetries are due to market structure, government intervention in price setting and other such policies.•The separation of food and non-food prices is important as oil price volatility influences both through different channels.•The results show significant positive effect of increase in oil prices on both; however, it is greater in non-food prices.•Moreover, a decrease in global oil prices does not translate into commodity prices decrease. This confirms asymmetry.•Outcomes suggest shifting to competitive market system to help removing these asymmetries and improve people’s welfare.