A symbolic illustration of the economic challenges facing a Pakistani family due to inflation, with a family and subtle desgin.

Decoding Pakistan's Inflation Crisis: How Rising Prices Impact Your Wallet and What Can Be Done

Jordan Keane in Business & Economy December 2025 • 4 min read.

"A deep dive into the causes, effects, and potential solutions to Pakistan's recent surge in inflation, exploring how it affects different households and what measures can help."

In recent years, Pakistan has faced significant economic headwinds, with inflation emerging as a primary concern for households across the income spectrum. Understanding the dynamics of this inflation – its causes, its impact, and potential solutions – is crucial for navigating the current economic landscape.

This article breaks down a comprehensive study analyzing the distributional impact of inflation in Pakistan, focusing on the period from November 2020 to November 2022. The study uses a detailed microsimulation model to simulate the effects of price changes on different household groups, providing valuable insights into who is most affected and why.

We'll explore how rising food and transportation costs have fueled inflation, examine the limited impact of energy prices due to specific economic factors, and discuss policy options that could help alleviate the burden on Pakistani families.

What's Driving Pakistan's Inflation?

A symbolic illustration of the economic challenges facing a Pakistani family due to inflation, with a family and subtle desgin.

Pakistan's headline inflation reached a concerning 41.5% between November 2020 and November 2022. Several factors contributed to this surge, with food and transportation prices experiencing the most significant increases. The study highlights that while energy prices did rise, their overall impact on welfare losses was limited. This counterintuitive finding stems from the fact that energy budget shares in Pakistani households are relatively small, and inflation in the energy sector, while present, remained comparatively low.

The study also reveals nuanced differences in the drivers of welfare losses across the income distribution. Food price inflation disproportionately affected lower-income households, while inflation in other goods and services had a greater impact on those at the top of the income distribution.

Food Price Inflation: A major burden for low-income households, comprising a significant portion of their budget.
Transportation Costs: Sharply increased, affecting households across the board but particularly those reliant on daily commuting.
Energy Prices: Although rising, their limited budget share meant a smaller overall impact compared to food and transportation.

Overall distributional consequences is mild, it still effects household welfare and should be accounted for by policymakers.

Finding Solutions: How Can Households Be Compensated?

To alleviate the pressure on households, the study suggests that transfers averaging 40% of pre-inflation expenditure would be necessary, assuming constant incomes. This figure underscores the magnitude of the challenge and the need for targeted interventions to protect vulnerable populations. While behavioral responses to price changes had a negligible impact on the overall welfare cost, understanding these responses can inform more effective policy design. The cost of living crisis was marginally progressive in nature, as well as having some impact to houshold's behaviour, to combat this, some policy changes would need to be implmented to stabalize this crisis.

About this Article -

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Everything You Need To Know

What were the primary drivers behind the concerning 41.5% inflation rate experienced in Pakistan between November 2020 and November 2022?

The surge in Pakistan's inflation, reaching 41.5% between November 2020 and November 2022, was primarily driven by significant increases in food and transportation costs. While energy prices also rose, their impact was limited due to the relatively small budget share allocated to energy in Pakistani households. The study emphasizes that food price inflation disproportionately affected low-income households, while inflation in other goods and services had a greater impact on higher-income groups.

How did rising food and transportation costs specifically impact different income groups in Pakistan during the inflationary period?

The study reveals distinct impacts across income levels. Food price inflation disproportionately affected lower-income households because food constitutes a larger portion of their overall budget. In contrast, higher-income households were more affected by inflation in other goods and services. Transportation costs increased across all income groups, impacting those reliant on daily commuting. These differences highlight the importance of targeted policies to address the varying burdens of inflation.

What was the impact of rising energy prices on Pakistani households during the inflationary period, and why was it considered limited?

Despite rising, energy prices had a limited impact on overall welfare losses within Pakistani households. This counterintuitive finding stems from the relatively small budget shares allocated to energy consumption in Pakistani households. Though energy prices did increase, their impact, when compared to food and transportation, was less significant in terms of overall welfare effects. The study highlights that while inflation was present in the energy sector, it remained comparatively lower than in other sectors.

According to the study, what kind of measures would be necessary to alleviate the financial strain on Pakistani households caused by inflation?

The study suggests that transfers averaging 40% of pre-inflation expenditure would be necessary to compensate households, assuming constant incomes. This highlights the magnitude of the challenge and the need for targeted interventions. Policymakers need to consider how to distribute this support effectively. Also, understanding the behavioral responses of households to price changes can inform better policy design to help minimize the welfare costs of inflation.

Besides the headline inflation figures, what other key insights did the study offer regarding the impact of inflation on different segments of the Pakistani population?

The study provided a comprehensive analysis of the distributional impact of inflation in Pakistan from November 2020 to November 2022. It revealed that food price inflation disproportionately affected lower-income households. Transportation costs increased across all income levels, particularly affecting those who commute daily. The study underscored the need for targeted interventions, such as financial transfers, and also highlighted the importance of understanding household behavioral responses to price changes to create more effective policy designs. It also emphasized that the cost of living crisis was marginally progressive.