Does Price Level Increase Income Inequality in Pakistan? A Disaggregated Analysis

Abstract

The crucial emphasis of economic policies is to enhance socio-c wellbeing of the people in an economy. If the society is economically polarized it hampers the impact of economic policies. The crucial economic problem about which fewer economists gutsy to talk is income inequality in the world because it is the answer to a pinching question that who will benefits from the economic growth in an economy. Despite the generation of trillions of dollars each year in the world, a huge population is deprived of basic needs such as food, sanitation, security, health and education etc. When it comes to the effect of inflation on masses the situation further aggravates. Escalated price levels deprive more people from essential goods and lead towards increasing income inequality. This study has tried to estimate the impact of inflation on income distribution in Pakistan. The data was collected from Pakistan Economic Survey and Handbook of Statistics by SBP for a period of 1990 to 2022. The present study has applied Auto Regressive Distributed Lag Model (ARDL) to estimate the linkage among price levels and income inequality in Pakistan. The findings of the study have revealed both positive and negative linkage among constituents of the CPI and the income inequality. The novelty of this study is on two grounds. Firstly, the study has dissolved Consumer Price Index (CPI) into its constituents, and their Impact on income inequality has been examined, as far as finest information available to us this has never been investigated in Pakistan before. Secondly, the study has applied two proxies the GINI coefficient and Mean Log Deviation (MLD) to estimate income inequality. Thirdly, we have applied the data splicing method[1] to make one base year of CPI from various base years that has been changed over the past years in Pakistan. The study offers some useful policy implications for policy formulation in Pakistan.