Economic Trends and Targets Chart 1.1: Impact of Different Variables on the Rate of Inflation A 1% Change in Change in Rate of Inflation in percentage points • Money Supply a 0.696 • GDP(Real)-1.443 • Level of Import Prices in(Rs) 0.172 • Inflationary Expectations 0.337 a lagged by one year Source : Estimated Therefore, improvement on the supply-side in terms of production has a big impact in the containment of inflation. Faster expansion in money supply puts pressure on the price level. As highlighted above, import price changes matter, and so do inflationary expectations, measured by the rate of inflation in the previous year. An analysis has also been undertaken of the determinants in the rate of change food prices. The results are given in Chart 1.2 below. Food prices move in line with changes in factors what impact on the overall rate of inflation. On top of this, faster growth in agricultural production limits inflation in food prices while a higher procurement price for wheat inevitably raises the overall food price index. Chart 1.2: Impact of Changes in Different Variables on the Rate of Inflation in Food Prices A 1% Change in Change in Food Price Inflation in percentage points • Overall Rate of Inflation 1.125 • Level of Agricultural Production-0.300 The impact of the first attack of COVID-19 was that by July 2020, there was a big deflationary impact on international prices, especially of oil. In Pakistan, this was neutralized by the precipitate drop in the value of the rupee. • Procurement Price of Wheat 0.213 There has been a big recovery in Source : Estimated global prices by June 2021. For example, the price of oil has gone up by almost$40 per barrel. The impact on domestic prices has been limited by a big reduction in the Petroleum Levy. Based on the elasticities in Charts 1.1 and 1.2 and projected values of the determinants projections have been made of the rate of inflation, overall and for food prices, up to 2024-25. These are shown in table 1.11. These projections reveal that there is a risk that the inflation rate may remain relatively high in 2021-22. This will be Table 1.11: Projections of Overall Inflation and in Food Prices(%) Years Overall Rate of Inflation Rate of Inflation in Food Prices 2020-21 8.9 12.8 2021-22 12.0 15.0 2022-23 8.0 10.0 2023-24 7.0 8.0 2024-25 6.0 6.0 15