Pakistan has undergone a significant economic growth during last few years, but the core problems of the economy are still unsolved. Inflation remains the biggest of all these problems. The aim of thisreport is to find the determinants of inflation in Pakistan, its causes and measures to control it.In this report the literature review explains the view point of Rafia Ehsan and Dr. Humayun Dar who isan economist and PhD from Cambridge University in determining the causes of inflation and establishinglinks of different variables with inflation such as fiscal and monetary policies, unemployment, demandpull and cost pull factors that affect inflation.The report highlights patterns in Pakistan from 2008 to 2012, which reports the last five years as highlyinflationary due to expansionary monetary policy and high oil prices. High international oil prices lead toincrease in transportation charges as well as energy intensive industry products such as metalcommodities. As producers pass on the increased costs to consumers, this leads to an increase in cost of Pakistani imports, which drives up inflation. The high levels of inflation reflect a volatile economy inwhich money does not hold its value for long. Workers require higher wages to cover rising costs, andare disinclined to save. Producers in turn may raise their selling prices to cover these increases, scaleback production to check their costs (resulting in lay-offs), or fail to invest in future production. Manysuch problems have been, and still are, being faced by Pakistan. The factors leading to high levels of inflation include deficit financing, foreign remittances, foreign economic assistance, increase in wages,population explosion, black money, prices of imported goods, devaluation of rupee, etc. Governmentactions are not useful, as we are not seeing any difference in the inflation rates.
Domestic production should be encouraged instead of imports; investment should be given preferencein consumer goods instead of luxuries, Agriculture sector should be given subsidies, foreign investmentshould be attracted, and developed countries should be requested for financial and managerialassistance. And lastly a strong monitoring system should be established on different levels in order tohave a sound evaluation of the process at every stage.