The Kingdom of Saudi Arabia has been witnessing a rise in prices for the past few years. This paper intends to examine the determinants of inflation, both in the long run as well as in the short run, using cointegration method developed by Pesaran et al. (2001). The result shows that inflation in world economy, depreciation of domestic currency and supply bottlenecks are the major factors influencing inflation in the long run. In the short run, money supply and supply bottlenecks have been found to be the major factors influencing inflation in the country.
Key words: Inflation, exchange rate, foreign inflation, money supply, supply bottleneck, bound test.
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