The Distributional Impact of Inflation in Pakistan: A Case Study of a New Price Focused Microsimulation Framework, PRICES

This paper develops a microsimulation model to simulate the distributional impact of price changes using Household Budget Survey data, income survey data, and an Input-Output Model. The primary purpose of this paper is to describe the model components. The secondary purpose is to demonstrate one component of the model by assessing the distributional and welfare impact of recent price changes in Pakistan. Over the period of November 2020 to November 2022, headline inflation in Pakistan was 41.5%, with food and transportation prices increasing most. The analysis shows that despite large increases in energy prices, their importance for the welfare losses is limited because energy budget shares are small. The overall distributional impact of recent price changes is mildly progressive, with significant impacts on household welfare across the expenditure distribution. The biggest driver of welfare losses at the bottom of the expenditure distribution was food price inflation, while inflation in other goods and services was the biggest driver at the top. To compensate households for increased living costs, transfers would need to be on average 40% of pre-inflation expenditure. Behavioural responses to price changes have a negligible impact on the overall welfare cost to households.