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Submitted By: Ajmal Yaseen, Qaiser Ali, M Adeel, Sohail Jaffar

ID: F1F16MCOM0031-0032-0033-0034

Section: MCOM-6A

Course: Business Research Methods (BRM)

Submitted To: Prof. Qaiser Farooq

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Table of Content:
Chapter 1. Dedication

Chapter 2. Executive Summary

Chapter 3. Introduction

3.1. Statement of Problem

3.2. Objective

3.3. Hypothesis

3.4. Significance

3.5. Limitation

3.6. Delimitation

Chapter 4. Literature Review

Chapter 5. Methodology

5.1. Nature of study

5.2. Procedure

5.3. Population

5.4. Data collection & Analysis

Chapter 6. Conclusion and recommendations:

6.1. Policies recommendations:

6.2. Conclusion

Chapter 7. References

7.1. Literature and research study:

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1. Dedication

This study is dedicated to our beloved parents and respected teachers; Because
of parents are the reason to our birth and teachers are mentor to keep flying in
sky and reason to success in present and future.

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2. Executive Summary
Inflation is simply rise in prices of commodities and devalues of money. It directly influences
the standard of living of middle class and others vice versa. This paper dealt with the “Impact
of inflation on purchasing power of middle class salaried person”. In this study we critically
examine the inflation impact with different aspects, the data about research is secondary and
collected via literatures, articles and online blogs. The data shows the scenario of problem
and then further its next step to dig up the solution to come up from this vulnerable situation.
These solutions may be in theoretical form or policies for recommendation to decrease
inflation’s impact.

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“Impact of inflation on purchasing power of middle class salaried person”

3. Introduction
“Inflation is defined as a rise in the general price level. In other words, prices of many goods
and services such as housing, apparel, food, transportation, and fuel must be increasing in
order for inflation to occur in the overall economy. If prices of just a few types of goods or
services are rising, there isn't necessarily inflation.”

Inflation takes place when an economy grows due to increased spending. When this happens,
prices rise and the currency within the economy is worth less than it was before; basically the
currency won’t buy as much as it would before. When a currency is worth less, its exchange
rate weakens when compared to other currencies.

Economists distinguish between two types of inflation: Demand-Pull Inflation and Cost-Push
Inflation. Both types of inflation cause an increase in the overall price level within an

• Demand-pull inflation occurs when aggregate demand for goods and services in an
economy rises more rapidly than an economy's productive capacity. One potential
shock to aggregate demand might come from a central bank that rapidly increases the
supply of money.
• Cost-push inflation, on the other hand, occurs when prices of production process
inputs increase. Rapid wage increases or rising raw material prices are common
causes of this type of inflation. The sharp rise in the price of imported oil during the
1970s provides a typical example of cost-push inflation

Consumer Price Index (CPI) is the main measure of price changes at the retail level. It
measures changes in the cost of buying a representative fixed basket of goods and services
and generally indicates inflation rate in the country. The Consumer price index was computed
for the first time with 1948-49 as a base for industrial workers in the cities of Lahore, Karachi
and Sialkot only. Continuous efforts have been made, since then, to make CPI more
representatives by improving and expanding its scope and coverage in terms of items,
category of employees, cities and markets. Accordingly, the CPI series were computed with
1959-60, 1969-70, 1975-76, 1980-81 and 1990-91 as base years. At present, the CPI is being
computed with 2000-01 as base year. And according to the studies of CPI, the inflation rate
during the fiscal year 2000-2001 was 4.41, during the fiscal year 2001-2002 it dropped down
to 3.54, further dropped to 3.10 during the fiscal year 2002-2003, rose again to 4.57 during
2003-2004, increased drastically to 9.28 during 2004-2005 and then dropped to 7.92 during
2005-2006. And by the mid of October 2006, the CPI is reported to be 8.43.

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The Sensitive Price Indicator (SPI) is computed on weekly basis to assess the price
movements of essential commodities at short intervals so as to review the price situation in
the country. The SPI is being presented in the Economic Coordination Committee of the
Cabinet (ECC). Sensitive price indicator was originally computed with 1969-70 as base
which was subsequently switched over to 1975-76, 1980-81 and 1990-91 as base year.
Presently, the SPI is being computed with base 2000-2001. And Sensitive Price Indicator
(SPI) shows the facts as; 4.84 in 2000-2001, 3.37 in 2001-2002, 3.58 in 2002-2003, 6.83 in
2003-2004, 11.55 in 2004-2005 and 7.02 in 2005-2006. Recently (By the mid of October
2006) the SPI is reported as 9.86.

The Wholesale Price Index (WPI) is designed to measure the directional movements of prices
for a set of selected items in the primary and wholesale markets. Items covered in the series
are those which could be precisely defined and are offered in lots by
producers/manufacturers. Prices used are generally those, which conform to the primary
sellers realization at ex-mandi, ex-factory or at an organized Wholesale level. The WPI
initially was computed with 1959-60 as base. Since then, continuous efforts have been made
to make the WPI more representatives by improving and expending its scope and coverage in
terms of commodities, quotations/markets, etc. Accordingly, WPI series were computed with
1969-70, 1975-76,1980-81 and 1990-91 as base years. Presently, the WPI is being computed
with 2000-01 as base. The Wholesale Price Index (WPI) tells the story as; 6.21 in 2000-2001,
2.08 in 2001-2002, 5.57 in 2002-2003, 7.91 in 2003-2004, 6.75 in 2004-2005 and 10.10 in

This study will shows the critical review how demand pull inflation and cost push inflation
affecting the middle class salaried person and which type of inflation affecting more rapidly.
Major purpose of this research to determine how the processes associated with what is
generally known as inflation affects the economic well-being of a particular group of the
Pakistan’s’ population, the middleclass salaried person. We will be concerned here with both
the technical problems like CPI , SPI and WPI to determining the impact of inflation on the
poor and with the relevance of the findings to questions of public policy.

3.1. Statement of the problem

Inflation stabilization does not come without costs. It is usually associated with a recession
which generally means more unemployment and lower real wages and buying power of
middle class.
It also argues that inflation affects poverty mainly through its impact on real wages: the
empirical evidence shows that wages increase more slowly than prices during episodes of
rising inflation in Pakistan.
Rising inflation is shedding down living standard. In Pakistan this is the most flaring issue
and it is also the determinant of decreasing the rank of Pakistan in HDI(Human development

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3.2. Objectives
Many researchers have been conducted on this issue but the researcher selected this unique
topic because it draws a:

• Relationship between inflation and standard of living of middle class person.

• Impact of inflation on particularly buying power of middle class salaried

A stable inflation provides:

• Nurturing environment for economic growth

• Uplifts the poor and fixed income citizens who are the most vulnerable in

3.3. Hypothesis

Inflation Nature of Job Middle Class

Salaried Person
(Independent) (Intervening)

Consumption Pattern


In this case we are assigning variables (independent , dependent, moderating and intervening)
and also knowing about impact of independent variable(inflation) on dependent variable
(middle class salaried person). Strong relation between independent and dependent via
intervening also discuss in this theory.

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In such scenario, middle class people are drastically effects because their incomes remain
static or grow slowly. Being static income earners, price hike disturb their economical
stability. When the price of goods increase the expenses on good also increase which
ultimately leads toward enhancement of family expenditures on goods but the wages and
salaries enhanced very slowly as compare to the prices of commodities. The study explored
that there is significance relationship between public expenditures growth and inflation. Such
inequality of growth produces imbalance in income and expenses therefore, it affects strictly
middle class as compare to the upper class and lower class as well.

3.4. Significance
When inflation is expected, agents in the economy can plan for it and act accordingly
businesses raise prices, workers demand higher wages, lenders raise interest rates and so on...
Over the long term, unanticipated inflation can cause a number of problems for an economy.
High inflation can lead to an increase in pay claims as people look to protect their real
incomes. This can lead to a rise in unit labour costs and lower profits for businesses.
High inflation may also lead to higher borrowing costs for businesses and people needing
loans and mortgages as financial markets protect themselves against rising prices and
increase the cost of borrowing on short and longer-term debt.
The inflation erodes Purchasing Power of middle class sector because the prices of goods
goes higher and higher and the income pattern still remain in limits.
The inflation effects on Wage Earners, Middle Class and Salaried Persons’ real standard of
living .

3.5. Limitation
There are some of economical indicators like; Import, Export and Exchange rates which
could not be covered in this study but they are also connected with the inflation and also
change according to the inflation , these variables are dependent variable where inflation is
independent variable. If this study come up with these factor then it should have more
resources and need more data to create critical sense of research.

3.6. Delimitation
This study is mainly connected with the middle class salaried person and hiss behavior
toward buying power when there is inflation condition therefore other economical factor can
be skipped. The data about this study is easily available in secondary form and the analysis of
this data can be perform in qualitative basis. For more validity of research interviews
conducted from Professionals of finance and economist.

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4. Review of the related literatures
The report highlights patterns in Pakistan from 2008 to 2012, which reports the last five years
as highly inflationary due to expansionary monetary policy and high oil prices. High
international oil prices lead to increase in transportation charges as well as energy intensive
industry products such as metal commodities. 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 in which money does not hold its value
for long. Workers require higher wages to cover rising costs, and are disinclined to save.
Producers in turn may raise their selling prices to cover these increases, scale back production
to check their costs (resulting in lay-offs), or fail to invest in future production. Many such
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. Government actions 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
preference in consumer goods instead of luxuries, Agriculture sector should be given
subsidies, foreign investment should be attracted, and developed countries should be
requested for financial and managerial assistance. And lastly a strong monitoring system
should be established on different levels in order to have a sound evaluation of the process at
every stage.
(Inflation in Pakistan Economics Report by Qanita Zakir)

Inflation is simply rise in prices of commodities and devalues of money. It directly influences
the standard of living. The study dealt with the effects of inflation on standard of living in
terms of expenses on food and non-food items, income, saving, loan and recreation. A sample
of 200 male heads of families was taken from 2 towns out of 6 towns of Multan, Pakistan;
using multistage sampling. Interview schedule was used as a tool for data collection. It was
inferred from analysis of data that inflation did highly affect the middle class. People are
compelled to get loan and to do over work, to fulfill their family expenditures due to the
inflation. It was also concluded that standard of living of middle class people is decreased in
2011 as compared to 2010 due to the inflation because their expenses boomed up but there
was minor increased in their income . Inflationary effects, at family level, can reduce, never
eliminate, through keeping money circulation and abating saving during persistently
intensifying inflation and renouncing to pay interest over money and goods, and income
ought to be increased with the same ratio of rise in inflation.
(Shahzad Farid, Waqas Ali Khan, & Imtiaz Ahmed Warriach, M.Phil Scholar of Sociology,

The study discusses the regressive nature of the inflation tax and the limited extent of its
impact on those individuals below the poverty line. It also argues that inflation affects
poverty mainly through its impact on real wages. The empirical evidence shows that wages
increase more slowly than prices during episodes of rising inflation. Finally the study
discusses whether sonic stabilization programs are less costly in Lenns of increased poverty

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than others Both orthodox programs and attempts to reduce inflation by the implementation
of incomes policy have not helped the poor.
(Eliana Cardnso Fletcher School Tufts University Medford,MA 02155 and NBER)

In this study an attempt is made to assess the impact of inflationary processes such as those
experienced performed on the economic well-being of the poor. In order to get a
comprehensive picture of such an impact three types of possible effects are examined in some
detail: effects of expenditure patterns, effects related to the sources of income, and effects due
to the nature of assets held by the poor. In looking at expenditure patterns, the authors
construct a Poor Price Index (PPI) and compare its movements with those of the Consumer
Price Index. The comparison suggests that price rises have hurt the salaried person less than
the non-salaried. On the income side, several types of evidence indicate that the benefits of
tight labor markets which normally accompany inflationary pressures are very important to
the poor.
(Robinson G. Hollister John L. Palmer)

The purpose of this research is to understand the effect that rising food prices have on the
consumer welfare in food producing countries. Agriculture is a major driver of economic
development in several developing countries like Pakistan; hence in these countries the
income of most of the people comes from the food production and other sources. This study
is aimed at analyzing the impact that the rising prices have on the income of people in these
economies. We focus on understanding the relationship between food prices and income of
consumers and also study how income is distributed amongst various stages of value chain.
To understand the impact on consumer welfare in a quantitative method we analyze the effect
on consumer surplus.

(Vamshi K R Kottam, I6051772 Msc Financial Economics)

5. Methodology of the research

5.1. Nature of study
The nature of this research is descriptive in a sense of this research is related to some event
which is, “Impact of inflation on purchasing power of middle class salaried person”. In this
way all the data are collected qualitatively and qualitatively explained as well. Inflation
between other three variable are defined very clearly and have relationship at all.

5.2. Procedure
First there is a problem which is research topic then the need to resolve this problem.
Defined clear picture of research topic and define variables. Data collected about variables
and observe the trending relation between all the variables. After analysis of data the results

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will have clear picture for all. After the results there is opportunity to test and implement this

5.3. Population:
For the purpose of this study the affected population is Pakistani salaried person and data are
collected relevant to them.

5.4. Data collection & Analysis:

Inflation and Salaried Person- Inflation and its effects on the economy of Pakistan to re-
examine that whether it is helping the economy or is harmful to the economy. The study
shows that there is negative relationship between inflation and growth of Pakistan’s economy
and its citizen. Study argued that different researchers have different opinion about the
threshold of inflation.

Inflation hurts middle class people more than the richer as more of their income is spent on
food items. It concluded that there is trade-off between inflation and GDP growth and
proposed that threshold of 7 per cent or below 7 per cent will have positive impact on the
economic growth of Pakistan’s economy. Study examined the relationship between money
supply and Inflation and its consequences on the economic growth. It is stated that the main
determinants of real income in an economy are the change in labour wages, capital and
technology. By using Quantity theory, study argued that the rise in prices is the determinant
of growth in money supply, its velocity and the growth of real income. It is calculated the
velocity of money from the data acquired from State bank of Pakistan using econometric
analyses like regression, correlation and covariance. The real income changes with the
passage of time, independent of demand for money, but the available resources to produce
goods and services are the real factor of increase in real income. It is concluded that in
Pakistan, the growth or money supply at the first stage affects the real GDP and then on the
second stage it leads to inflation.

Those households who have lower income living in urban areas suffer more because of
inflation as compared to rural areas. He recommended that in such situations when inflation
suddenly shoots up, government should assist people with lower income by providing them
basic need of life.

Before 2007, the inflation was not drastically increased but after 2007 there was an
uncontrollable boom held in inflation. The necessities particularly food items became
inaccessible especially for labor. During 2007 to 2008, the prices of goods consecutively
grew but the price of services did not rise with the same ratio. Therefore, the fluctuation in
the prices of goods and services has left several adverse on individuals’ life. Such kind of
fluctuations is one of them which brought many problems and enervating standard of living
of middle class. Thus, the core objective of this study is to explore the effects of inflation on
standard of living. The main objective is classified into some sub-objectives like measuring
the impact of inflation on particularly middle class person.

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Federal Bureau of statistics, Pakistan
Pakistan publishes four different price indices

• The consumer price index (CPI)

• The whole sale price index (WPI)
• The sensitive price index (SPI)


The main measure price changes at retail level

Indicates the cost of purchasing a representative fixed basket of goods and services consumed
by middle class person.

In Pakistan, the cpi covers the retail prices of 374 items in35 major cities and reflects
roughly the changes in the cost of living of urban areas.


Designed for those items which are mostly consumable in daily life on the primary and
secondary level.

These prices are collected from wholesale markets as well as from mills at organized
wholesale market level

It covers the wholesale price of 106 commodities prevailing in 18 major cities of paksiatn.


The weekly change of price of 53 selected items of daily use consumed by households.
Informs about the actual position of supply: whether the commodity is available in market or

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Another study was conducted to know the relationship between unemployment and inflation.
In this study the consumer price index also discussed.

Data was collected from 2001 to 2013.

Analysis of data is also given below with graphical form.

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Another graphical analysis of inflation from 2008 to 2012 using CPI

The inflation rate in Pakistan was last reported at 10.8 percent in March of 2012. From 2003
until 2010,the average inflation rate in Pakistan was 10.15 percent reaching an historical high
of 25.33 percent in August of 2008 and a record low of 1.41 percent in July of 2003.

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6. Conclusion and recommendations:
6.1. Policies recommendations:

There are many methods used to control inflation, some work well, while some may
have having damaging consequences such as a recession. For example, controlling inflation
through wage and price controls can cause a recession and hurt the people whose jobs are lost
because of it.

One popular method of controlling inflation is through a contractionary monetary policy. The
goal of a contractionary policy is to reduce the money supply within an economy by
decreasing bond prices and increasing interest rates. This helps reduce spending because
when there is less money to go around, those who have money want to keep it and save it,
instead of spending it. It also means that there is less available credit, which can
also reduces spending. Reducing spending is important during inflation, because it helps halt
economic growth and, in turn, the rate of inflation.

There are three main ways to carry out a contractionary policy.

The first is to increase interest rates through the Federal Reserve. The Federal Reserve rate is
the rate at which banks borrow money from the government, but, in order to make money,
they must lend it at higher rates. So, when the Federal Reserve increases its interest rate,
banks have no choice but to increase their rates as well. When banks increase their rates, less
people want to borrow money because it costs more to do so while that money accrues at a
higher interest. So, spending drops, prices drop and inflation slows.

The second method is to increase reserve requirements on the amount of money banks are
legally required to keep on hand to cover withdrawals. The more money banks are required to
hold back, the less they have to lend to consumers. If they have less to lend, consumers will
borrow less, which will decrease spending.

The third method is to directly or indirectly reduce the money supply by enacting policies
that encourage reduction of the money supply. Two examples of this include calling in debts
that are owed to the government and increasing the interest paid on bonds so that more
investors will buy them. The latter policy raises the exchange rate of the currency due to
higher demand and, in turn, increases imports and decreases exports. Both of these policies
will reduce the amount of money in circulation because the money will be going from banks,
companies and investors pockets and into the government’s pocket where they can control
what happens to it.

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• Giving priority to the agriculture sector and within agriculture to high value and
minor crops.
• Improving the post harvest. Marketing storage and transport system for crops to
reduce crop losses and ensure reasonable prices.
• Expanding processing facilities for high value crops to even out seasonal functions in
• Pay special attention to food prices
• Relaxation on import regime allowed imports of several essential items so that there is
a continuous flow in the supply of those important commodities
• Increase the scale of operations of the utility stores corporation (USC) which suppies
essential commodities such as wheat flour, sugar, pulses and cooking oil/ghee at less
than the market prices.
• Increase in the growth rate of output
• Highly increasing unproductive expenditures must be control
• Government should check the corruption first to eliminate the inflation
• Control on population is also necessary to control inflation
• Reduction in budget surplus
• Reduction in monetary expansion
• Effective tax system will be helpful to control the inflation
• Improvement in balance of payment
• Developments of agricultural and industrial sector will helps to control the inflation.

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6.2. Conclusion:

The study discusses the regressive nature of the inflation tax and the limited extent of its
impact on those individuals below the poverty line. It also argues that inflation affects
poverty mainly through its impact on real wages. Inflation creates the problem like it
decreases the buying power , living standard and the value of money. If we control it
through proper system like interest rate, import , export and taxes, the concerned
problems will decrease and our economy will grow and it can promote foreign direct
investments from the countries to conduct business operation in Pakistan.

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7. references section
7.1. Literature and research study:
1. Robinson G. Hollister , John L. Palrmler “The impact of inflation on poor”

2. Vamshi KR Kottam (MSC Financial Economics) “The impact of rising prices on

consumer welfare in producing economies”

3. National bureau of economic research, working paper by Eliana Cardoso “Inflation

and poverty”

4. Department of economics, School of management, university of Liverpool UK,

working paper by Mustafa Caglayan “Impact of inflation on relative price variability”

5. Forsells, Magnus; Kenny, Geoff “The rationality of consumers' inflation expectations:

survey-based evidence for the euro area”

6. Sébastien Dessus , Rafael De Hoyos “The Impact of Food Inflation on Urban Poverty
and Its Monetary Cost”

7. Arkadiusz Sieron* “Inflation and income inequality”

8. Kulliyyah of Muamalat Kolej University Insaniah (KUIN) Lebuhraya Sultanah

Bahiyah, Alor Setar, Kedah Darul Aman, Malaysia , Article by Yusuf Haji- Othman
& Sani Yahaya “Purchasing power parity: evidence from selected high and low
inflation countries”

9. (Inflation in Pakistan Economics Report by Qanita Zakir)

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