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lied for the estimation of values of coefficients. The explanatory variables that are budget deficit, exchange rate, wheat prices, imports and money supply are found to be directly affecting all the price indicators while interest rate is indirectly related to all the explained variable in Pakistan.

Ahmad, Eatzaz; Ali, Saima Ahmed (September 22,1999) determines the simultaneous role of inflation and exchange rate in Pakistan by considering temporary and permanent shocks that how two variables are being adjusted and what is the pattern of two variables in response of these shocks. The shocks which they consider are real and monetary shocks and also the import prices, export prices and foreign exchange reserves. They find that the relationship between the price level and exchange rate is not unidirectional. Movements in the exchange rate occur mostly due to changes in the price inflation thus exchange rate cannot be used as independent instrument in the presence of inflation. Hence, they conclude that both the inflation and exchange rate are the interrelated with each other.

Gregorio, Launderretche and Neilson (2007) find a decline in pass-through from the price of oil to general price level. They find a fall in the average estimated passthrough for industrial economies and lesser degree for emerging economies. The effect of oil shocks on inflation has weakened for most of the twelve countries in the sample. Among the factors that might help to explain this decline in the reduction of oil intensity of economies. Around the world , a reduction in exchange rate pass-through, a more favorable inflation environment and the fact that current oil price shock is largely the result of strong demand. These factors help to explain why oil shocks had limited inflationary effects. Chen (2009) uses data for 19 industrial countries and a state space approach to estimate time varying oil price pass-through coefficients and find evidence of declling pass-through of almost 19 countries. The study investigated some potential explanations for pass-through and concludes that an appreciation of domestic currency, a more active monetary policy in response to inflation and a high degree of trade openness are major causes of declining oil pass-through.

Laryea and Sumaila (2001) have examined the major determinants of inflation in Tanzania. For this analysis, they have udes time series data from 1992-1998 on quarterly basis. OLS method has been applied to have this estimates. The analysis demonstrates that money supply and exchange rate have positive impression on inflation (CPI) while GDP has negative impact on inflation of Tanzania.

MODEL SPECIFICATION, METHODOLOGY

AND DATA COLLECTION

To examine the effect of inflation on oil prices, this paper utilizes a regression approach to see whether there exists any relationships between the variables or not. The model is based on these variables

Inflation Rate

Oil Prices

Money supply

Real Effective Exchange rate

Unemployment

Data

In this study the annual data for the period 1980 to 2010 is used. Time series data is used here for analysis.

Data Sources

And the main sources of data are

WDI : World Development Indicator

IFS: International Financial Statistics