Global Commodity Prices and Inflation in a Small Open Economy

Global commodity prices surge of 2007-08 sent an inflationary shock across the countries. 2014 global prices descend resulted in significant disinflation in many countries and even deflation in some economies. The linkages between global commodity prices fluctuations and inflation in small open economy, Pakistan are explored. Global price fluctuations are found to be dominant sources of inflation dynamics in Pakistan during July 1992 to June 2014. Food inflation and overall inflation in Pakistan is linked to international food prices changes. Non-food and administered prices’ inflation are result of global oil price increases. For core inflation, global prices of metal and cotton matter most. Global commodity prices changes impact overall inflation in Pakistan rather quickly compared to monetary policy actions. Core inflation takes longer to respond to all type of shocks including global price fluctuations. Monetary and exchange rate policies do have role in influencing inflation outcome in