(1/n) THREAD on y inflation has been increasing in #Pakistan over last few months. Governance may be a problem in broader agriculture market, but i dont find must evidence showing that the recent mess up in wheat & sugar supplies played an imp role in driving up food inflation...
(2/n) Let's start with inflation data provided by PBS. Infl (black line) has seen an upward trend throughout 2019. However, all of this is driven by Food Infl (orange line). Food infl did stabilise between Mar-19 & Jul-19 but then increased from 8% in Jul-19 to 20% in Jan-20. 
(3/n) In contrast, Non-food infl (blue line) has remained stable throughout. Perhaps monetary policy (MP) is doing wat it is meant to do: control non-volatile component of infl. Core infl (Urban) is only 7.9% in Jan-20. But let's leave MP aside & turn to the important question...
(4/n) Wat is behind this trend in food-infl starting frm Aug-19? Is it 'mismanagement' of wheat & sugar supplies as argued by most? Or, is it wat PBS data shows? Food items seeing biggest yoy increase in prices do not include wheat/sugar but tomatoes, onions etc (data attached)
(5/n) To solve this puzzle, I construct counterfactual food-infl series. I ask how food infl wud hav evolved since Aug-19 if wheat or sugar or tomatoes or onions etc were not part of food basket. I use PBS data (food & non-alcoholic beverages part of CPI basket) for this purpose.
(6/n) Fig 2 presents my results. Dash-black line is actual food inflation. Every other line shows wat food infl would hav been if one of the food items was not part of the food basket. E.g., yellow line shows how food infl wud hav evolved if onions were not part of food basket.
(7/n) Results are revealing. If we take out wheat (green) or sugar (red) from food basket, food infl wud still hav increased by same amount. This goes against the governance hypothesis. The mess up in wheat & sugar supplies did not hav a significant affect on food infl.
(8/n) Lets turn to other items. Taking out fresh vegetables (purple line) frm food basket decreases food infl by 4% (i.e. frm 22% to 18%) in Jan-20. Just out of interest, look at tomatoes. Taking out tomatoes from food basket wud hav lowered food infl by about 5% point in Nov-19.
(9/n) Yes, food infl has been key in driving inflation. But food infl itself has increased not bec of wheat or sugar shortages but due to other items. This is not to say that wheat/sugar do not matter. It just means that there is nothing special about these in explaining infl.
(10/n) Wat explains price increases in other items? Onion prices hav increased due to bad harvest in India (bloom.bg/2SrMkin). This created excess demand for onions thus affecting regional prices. Worth looking wat is driving price increases in other items. I dont know yet
(11/n) It is still possible tht governance has affected all food prices, not just wheat & sugar. But for this to be true, it must explain why food infl started increasing since Aug-19? For now, I cannot recall any such event which lead to a 10% increase in food-infl since then.
(n/n) Nonetheless, there is an obvious trend in food infl starting frm Aug-19. It continues to increase even after taking out some key items frm the food basket (see Fig 2). Why r food prices seeing an increasing trend but non-food prices are not? This is worth exploring further.
('n+1'/n) See below for continuation of this thread. Turns out food-infl would have been very similar to non-food infl after I exclude three most important items (i.e. onion, tomatoes and fresh veg prices) from the food basket.
