Inflation, Consumer Market Responses, and Poverty Dynamics in Pakistan: An Integrated Econometric and Behavioral Analysis

Abstract

This study investigates the relationship between inflation, consumer market responses, and poverty dynamics in Pakistan using an integrated econometric and behavioral framework. Annual time-series data from 1985 to 2025 are utilized to examine the long-run and short-run associations among poverty, inflation, government expenditure, foreign direct investment (FDI), and economic growth. The study employs the Autoregressive Distributed Lag (ARDL) model along with the Fully Modified Ordinary Least Squares (FMOLS) technique to ensure robustness and consistency of long-run estimates. The empirical findings reveal that inflation has a positive and statistically significant effect on poverty in the long run, indicating that rising price levels reduce purchasing power and intensify economic vulnerability. Government expenditure, FDI, and economic growth exhibit negative and significant impacts on poverty in the long run. In the short run, only FDI remains significant. From a behavioral perspective, inflation alters consumption patterns, increases price sensitivity, and shifts demand toward essential goods. The results highlight the need for integrated macroeconomic and market-based policy interventions to reduce poverty and stabilize consumer welfare.