INFLATION, ITS CAUSES & IMPACTS

Submitted by:
Sania Nazir (BB-5860)
Tooba Rao (BB-5711)
Wajahat Ghani (BB-5652)
Saima Nazir (BB-5859)
Dated: 3-NOV-2019 SPRING-2019

SIR SYED AHSAN ALI

COURSE: MONEY AND BANKING
 What is inflation?
In economics,
• Increase in general price level of goods and
services
• Over a period of time
• In an economy
• Purchasing power of currency is falling
 Inflation?
• In economic, inflation is a sustained
increase in general price level of
goods and services an economy over
a period of time.
• To put it simply, inflation is the
long term rise in the prices of goods
and services caused by the
devaluation of currency.
• Inflation is the rate at which the
general level of prices for goods and
services is rising and, consequently,
the purchasing power of currency is
falling.
 Types of Inflation
1. Demand-Pull Inflation
2. Cost-Push Inflation
3. Built-In Inflation
 Causes of Inflation
External causes of inflation
1. Rise in the price of crude oil
2. Rise in global commodity prices
3. Higher inflation in other countries
 Causes of Inflation
Internal causes of inflation
1. The Money Supply
2. The National Debt
3. Exchange Rate
4. Demand-Pull Inflation
5. Cost-Push Inflation
 Causes of Inflation
4. Demand-Pull Effect
• Depreciation of exchange rate
• Higher demand from a fiscal stimulus
• Monetary stimulus to the economy
• Fast growth in other countries
 Causes of Inflation
5. Cost-Push Inflation
• Component costs
• Rising labor costs
• Expectations of inflation
• Higher indirect taxes
• A fall in the exchange rate
• Monopoly employers/profit-push inflation
 Types of Inflation Indexes
1. The Consumer Price Index
2. The Wholesale Price Index
3. The Producer Price Index
 The Consumer Price Index
• Examines the weighted average of prices of a basket of goods and services
• Primary consumer needs
• Calculated by taking price changes for each item in the predetermined basket of goods
• Relative weight in the whole basket
• Changes in the CPI are used to assess price changes associated with the cost of living
 The Wholesale Price
Index
• Measures and tracks the changes in the price of goods in the stages before the retail level
• WPI items vary from one country to other
• Mostly include items at the producer or wholesale level
 The Producer Price Index
• Measures the average change in selling prices
• Domestic producers of goods and services
• Over time
• PPI measures price changes from the perspective of the seller and differs from the CPI
which measures price changes from the perspective of the buyer
Pakistan Inflation Rate
Effects of Inflation
 Impacts of Inflation
1. Erodes Purchasing Power
2. Encourages Spending, Investing
3. Causes More Inflation
4. Raises the Cost of Borrowing
5. Lowers the Cost of Borrowing
6. Reduces Unemployment
7. Increases Growth
8. Reduces Employment, Growth
9. Weakens or Strengthens Currency
 Effects of Inflation
1. Effects on Distribution of Income and Wealth
• Creditors and debtors
• Producers and workers
• Fixed income-earners
• Investors
• Traders, speculators, businesspeople and black-marketers
• Farmers
 Effects of Inflation
2. Effects on Production
3. Effects on Income and Employment
4. Effects on Business and Trade
5. Effects on the Government Finance
6. Effects on Growth
 Conclusion
But inflation, especially a runaway inflation, is an unstable situation. It makes the
business world uneasy and uncertain. Society gets disturbed as there grows
discontentment among the salaried people and they demand an increase in their wages
and salaries.
The middle-class people suffer hard as the real value of their income becomes very low.
Inflation is also unjust as it makes one class of people richer and the other poorer. But the
most serious effect of inflation from the standpoint of the economy is that it makes the
economic environment of business unstable.