State Bank’s blind spot

IN its latest State of the Economy report, the State Bank has an interesting chapter on inflation dynamics in Pakistan that is worth a close read. It is an ambitious effort, probably the most ambitious that I have seen so far, to study the determinants of inflation in Pakistan and try to discern the relative weight that each of the factors studied has in driving inflation. But not all ambitions are destined to be fulfilled. Sadly, the effort fails to produce a convincing argument, and for good reason. Part of the reason is because there are glaring blind spots in the way the authors build their variables before plugging them into their model. They start by noting that “[m]ost previous empirical research suggests that inflation in Pakistan has been significantly a monetary phenomenon”. But then, they turn to the latest bout of inflation which started in 2021 and is continuing today. Regarding this, they come to a very different conclusion.