Statistical Analysis of the Factors Affecting Inflation in Pakistan

Abstract

The main focus of this study is to analyze the factors affecting inflation in Pakistan. Stepwise linear Regression, backward elimination and forward selection procedure has been applied through SPSS statistical package to test the significance of relationship of producer price index, money supply, durable goods, electricity, exchange rate, import, export, natural gas, oil products, crude petroleum, capital goods export, capital goods import, food export, food import, agricultural products export and wages on CPI inflation. Principal component analysis is performed to remove the multicollinearity among explanatory variables. It is found that durable goods, electricity, import, natural gas, steel mills product, capital goods export, food import and government sector borrowing has affect on inflation in Pakistan. The more the government borrows, the more the money supply increases and hence inflation increases.