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Inflation in Pakistan: Antecedents and consequences

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European Journal of Social Sciences
ISSN 1450-2267 Vol.25 No.3 (2011), pp. 77-86
© EuroJournals Publishing, Inc. 2011
http://www.europeanjournalofsocialsciences.com

Inflation in Pakistan: Antecedents and Consequences

Muhammad Aamir
Hailey College of Commerce, University of the Punjab, Lahore, Pakistan
E-mail: aamir@hcc.edu.pk
Tel: +92-300-8822928; Fax: +92-423-99231274

Monazza Karamat
Hailey College of Commerce, University of the Punjab, Lahore, Pakistan

Muhammad Farooq Rehan

Hailey College of Commerce, University of the Punjab, Lahore, Pakistan

Hafsa Noreen
Hailey College of Commerce, University of the Punjab, Lahore, Pakistan

Kanwal Iqbal Khan

University of Central Punjab, Lahore, Pakistan

Abstract
This study is an attempt to understand the complex process of inflation which has become
more than just a problem all around the world. The paper not only gives a brief review of
inflation from 1960-2010 but also tell all the indices: WPI, CPI, SPI and GDP Deflector, on
the basis of which inflation is being measured in Pakistan. The study explores the causative
factors of inflation: the gap between demand and supply, increased supply of money,
devaluation of currency, deficit budget, increased prices of food, fuel, raw material and
finished goods, rate of exchange, rate of interest, rate of tax, energy crisis, increase in
wages and salaries, foreign remittances, infrastructural problems, inflationary expectations.
The most vulnerable group-the poor, Growth rate of the economy, value of money,
business sector, foreign investment, and investment as capital and the development of
financial sector are severely affected by high inflation rate. Inflation can be controlled by
demand management policies, minimizing the borrowing and deficit budget, pacing the
growth of money supply with the growth of nominal GDP and by maintaining fair rate of
currency depreciation, Monetary measures, fiscal actions, increasing tax rates, imposing
high custom on imports, political stability, encouraging saving habits among people &
other policy decisions.

1. Introduction
By inflation we mean an increase in the price of goods and services over a time period. Ackely stated
that when the price of commodities, goods or services increases, it is term as inflation. When we buy
too little things with huge amount of money this is Inflation in point of view of Coulbourn and
Crowther said that in the Inflation although income increases but the prices go up speedily, with which
consumer or buyer purchase few goods against high prices i.e. value of money fall. In the long run
inflation, always and everywhere, is a monetary phenomenon [Friedman (1963)]. The inflation rate

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gives a view about the status of economy. The complex process of inflation made it difficult to apply a
universal practical model for all countries & for all situations. There is a discrepancy regarding
inflation & price rates. Inflation is a monetary process and maintenance of constant price rates cannot
be achieved without monetary nourishment but monetization (conversion of fiscal debts into available
currency) triggers inflation. Structural reforms by IMF in developing economies can also result in
inflation even if polices are obliging as to increase productivity we have to raise wages & salaries rates.
Various economists had repeatedly emphasized that inflation is something more than an
economic problem because the supply of money is a variable that is determined sociologically and
there is a sociopolitical group that is making very organized struggle for distributive shares. This
struggle has gained a new scope which forces the government to increase the money supply
continuously. This situation made it difficult for the state to decide that either they should suppress or
justify the conflict as this situation threaten the market titling economies. To suppress the distributional
dispute the state have to put limitation on trade union activity along with imposition of rigorous
discipline on workers & state have to reduce the political rights. Such limitations can only be made by
some particular oppressive government which is not feasible. So government left with no other option
except the rise in the supply of money so that the social conflict can be softened. Such inflation can
result in serious political, social & economic after effects.
Pakistan is a developing country and inflation had been very low for a vast span of time until
2003 after which it started rising. In 1960s the inflation rate, average, was 2.6% in terms of WPI
(whole price index). Later on in 1970s it boasts up to 12%-18% and hence entered in two-digit figure.
This rise was due to currency devaluation, oil stocks and flood. Pakistan gained the single-digit
inflation rate again in 1980s and during the first three years of 1990s, except 1990-1991, during which
it was 11.7% due to GULF WAR. In 1994-95 WPI and CPI show a sharp increase and reached to 19%
and 13% respectively. Despite of crises in 1998-1999, the rate of inflation reduced to even below 5%
in 2000 and sustained low till 2003. This low rate was the result of tight monetary policy. In late 2003,
monetary growth picked pace and as a result inflation rate rose to 11% .However by September 2005
the rate of inflation stabilized up to some extent and held around 8-9%. In 2008 Pakistan had faced the
worst inflation rate of 26.79%; however it dropped to 14.2% in 2009. In June 2010 the inflation rate
was recorded as 12.69%. Hence Pakistan has experienced the drastic inflation rate of 25.33% in august
2008 and lowest inflation rate of 1.41% in July 2003 which is a record in Pakistan history. In Pakistan,
2003-2010, the average inflation is recorded as 10.15%.
According to FBS, 2010, Government targeted the CPI as 10% while central bank projected it
as 12% in year 2009-2010, in actual it raised to 11.73%. This has happened mainly due to
extraordinary rise in the tariff of electricity. If this rise in tariff had not happened CPI could be
restricted to one digit figure. But government was bound to raise tariff as it had promised to
International Monetary Fund (IMF). Inflation in food decreased from 30% to 14.48% in last fiscal
period & in June 2010 it further came down to 12.69% (Federal Board of Statistics 2010). The index
for non-perishable & perishable food items climbed to 13.64% & 20.76% respectively. Fuel & lighting
index rose to 16.36% while those of house rent to 9.69%. inflation in education & health surged to
8.36% while inflation in communication and transport expenses went up to 15.82%.Whole-sale Price
Index(WPI) rose to 12.63% while Sensitive Price Index (SPI) to 13.32%.

Indices from 2006-2009

Index 2006-07 2007-08 2008-09

CPI 7.89 10.27 22.35
SPI 11.13 14.09 26.33
WPI 6.92 13.70 21.44
Source: (Parveen Zaiby, Daily The News, June 16, 2009)

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This present study is aimed to reveal the causes and effects of inflation in Pakistan as well as it
is a try to suggest some corrective measures to control this menace of inflation in the country which is
eating our economy. In other words researchers are determined to find the answers of following
questions:
1. How inflation can be measured?
2. What are the antecedents of high inflation in Pakistan?
3. What are the consequences of this high inflation?

1. How Inflation can be Measured?

Inflation can be measured for various timeframes like weekly, monthly, quarterly, semiannually and
annually. Short term inflation rates provide information about effect of economic, political and social
situation on current inflation rates. Long term inflation rates provide information about economic
condition of the country more comprehensively as in long term rates the sudden price volatility is
round off. Thus, they are much better then short term measure. International Monetary Fund and
various countries show their inflation rates annual.

1.1. Indices of Inflation

In Pakistan the measures that are mostly used are below:
1. Consumer price index
2. GDP deflator
3. Wholesale price index
4. Sensitive price index

Indices Cities covered Item covered Market covered Commodities covered

WPI 18 425 18 106
CPI 35 374 71 92
SPI 17 53 53 -
Source: (Parveen Zaiby, The News, June 16, 2009)

1.2. Accuracy of the Measurement

To measure the inflation accurately we need to get the correct figure, related things have to be kept in
mind. Firstly, the type of the collection of market prices has to be decided. Secondly, at the time of
measurement attention must be given to changing figure.

1.3. Utility of Measurement

Inflation serves as a target of public policy because it has an effect on the economic welfare. Measure
of inflation has a clear effect on the construction of other economic figure.
There are different methods for the calculation of inflation rate;

1.4. Method I
Rate of inflation = [ ( P0 – P-1) ÷ P-1 ] x 100%
P0 = Current average price level
P-1 = Price level of last year

1.5. Method II
Rate of inflation = log P0 – log P-1
P0 = Current average price level
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P-1 = Price level of last year

1.6. Method III

In this Method we can calculate rate of inflation by base period and it is more common method also.

1.7. Method IV
This method is called chained measurement method. In chained measurement method we adjust, each
price period, the prices along with the involved contents of market.

2. What are the Antecedents of Inflation in Pakistan?

At first there were only two theories regarding inflation: cost push and demand pull, but later on when
inflation rates become high, three more theories became famous: The Monetarist Inflation Model, The
Structural Model and The Philips Curve Model [Frisch (1977)]. In The Monetarist Model, the past
behavior of money to output ratio is considered and is also the motto of Friedman’s theory (1968):
“inflation is always and everywhere a monetary phenomenon” and it demonstrates that monetary
policy plays important role against inflation. This model was presented by Friedman (1968, 1970 and
1971) and later on positively tested by Schwartz in 1973. Philip Curve Model suggests that there is a
trade-off between inflation and unemployment i.e. there cannot be high unemployment rate and low
inflation rate at the same time. This model was developed by A.W. Philip and later on by Lipsey
(1960) and Samuelson and Robert Solow (1960). Structural Model considers growth of production,
wages and income flexibility, important drivers of inflation. This model is supported by Streeten
(1962); Olivera (1964); Baumol (1967) and Maynard and Rijckeghem (1976).
These theories are, no doubt, milestones in understanding the factors behind inflation but these
theories are not adequate, when we talk about Third World Countries as inflation is much more
complex in these countries. As in The Monetarist and Philip Curve Model, there is an assumption of
immediate market-clearing which is too preventive in these countries as there are structural rigidities.
While the tradeoff between unemployment and inflation is not much definite. So in Third World
Countries there are many other factors that should be considered [Hasan, Khan, Pasha, and Rasheed
(1995)]. So when the discussion comes to Pakistan we will consider many other factors Along with
demand-supply gap, costs push factor, unemployment, production growth and wages and salaries. In
1994 Pakistan Institute of Development Economics (PIDE) identified, increased prices of food, fuel,
raw material and finished goods, expectations about inflation, GDP in relation to growth of supply of
money, as the key factors behind inflation [Naqvi, et al, (1994)]. The director ranked food prices at
first, inflationary expectations as second and money supply as third (and less important), among the
causative factors of inflation. There are many other factors like indirect taxes, high prices of
agricultural support, currency devaluation, rise in utility prices, power shortage, rise in salaries and
infrastructural problems, which contribute to high inflation rate.
Economists and authors include; growth of money, rate of interest, the GDP (real), the rate of
exchange and supply side(by some authors) as monetary factors which are the main determinants of
inflation in the Pakistan. For example, The development of financial sector is one of the determinants
of inflation [Khan, Senhadji and Smith (2006)], import prices, supply of money and GDP determine
the inflation in Pakistan [Khan and Qasim (1996)], Bilquees (1988), Hussain (2006)], Choudary and
khan (2002) found no while Hyder and Shah (2004) found some relation between inflation and
exchange rate through empirical studies. Hasan, Khan, Pasha, and Rasheed (1995) are of the belief that
inflation rate appreciate the real rate of exchange thus it erodes the competitiveness and result in
pulling of exports and ultimately balance of payment is disturbed. Some authors pay more emphasis on
structural factor, like food, while considering inflation in Pakistan [Khan and Qasim (1996)] and others
on non-food factors like supply of money, prices of imported goods, GDP and prices of electricity. In

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2005 Sherani found that CPI, no doubt, raise due to wheat support price but this not necessarily is the
reason behind high inflation as high inflation is the result of weak monetary conditions.
A sudden change in price of goods causes inflation. When the aggregate demand of the goods is
more than the aggregate supply of goods this is called Demand-Pull Inflation. When supply of goods of
particular sector fall short for a long span of time, its prices goes up& it becomes a major cause of
inflation in economy, this explains The Cost-Push Inflation. The demand exceeds supply in Pakistan
due to energy crises, sick industrial units, shortage of material and lack of trained labors etc. If all the
other factors remain same then this factor is beyond the limit of government and government has no
direct control over it [Hasan, Khan, Pasha, and Rasheed (1995)]. In general the effect of tax rates are
considered indirectly related to deficit budget but the impact of excise duty and sales tax is in fact
direct on finished commodities as well as on raw material. The tax rates have been increased in
Pakistan and on some commodities even value added taxes has been charged. If government imposes
more taxes on goods then producers normally transfer the burden of taxes to the customer.
Consequently the selling price of goods increases which pushes the inflation level up. Government of
Pakistan purchased some commodities, especially wheat, cotton and sugar, at high prices than the price
prevailing in the market, to provide support or to encourage farmers. This act at one hand provided
subsidy to people but on the hand it violated the criteria of efficiency and hence the general prices
increased [Hasan, Khan, Pasha, and Rasheed (1995)].
Another major cause of inflation in any country can be rapid increase in circulation of money as
it increases the demand for goods and services, due to this factor price level starts rising. Monetary
authority is authorized to control the inflation by stabilizing the prices of commodities and by giving
necessary regulations to commercial banks. Rain, flood, bad weather, political situation and many
other factors can upset the production level. The effect is low production which causes the shortage of
supply as compared to the demand. The study of Aisen and Veiga (2006) also empirically showed a
positive relationship between political instability and inflation rate in Pakistan. It is observed that it is
the government crises rather than prices of oil, which results in inflation in Pakistan. Pakistan import a
lot of goods from the other countries and being a Small Open Economy (SOE), our domestic economy
cannot escape from the after effects of internationally rise in prices. This problem become worse when
we have to import raw material and our national currency is devalued as we have to accept the
international prices as offered. This external price shock will leads to high prices of domestic
commodities and hence inflation [Ellie 82I, 2008]. The difference between imports and exports i.e.
balance of payment, also causes inflation in Pakistan [Khan and Qasim (1996)]. Pakistan has been
facing the problem of unemployment and brain drain. The number of overseas Pakistani is huge and
getting large day by day. The foreign remittance is also playing major role in creating inflation in
Pakistan. Foreign remittance means more money with the people and more money means more
demand of goods and more demand means high prices of goods which lead to inflation. Population
growth rate has been high and more population demands more goods but unfortunately government has
been unable to provide enough commodities to people which result in demand-supply gap and
ultimately inflation. The black money earned through smuggling, tax avoidance etc. increase the
demand for luxurious goods which results in the inflation. The consumption habits of the people also
lead to the inflation. When the people will buy more and more, the demand will increase and the result
will be the inflation.
Pakistan has been the victim of deficit budget. Budget becomes deficit when the government
expenditures are more than its income. Several studies like Chaudhary and Ahmad (1995), Catao and
Terrones (2003), Shabbir and Ahmed (1994) shows that deficit budget and inflation in developing
countries have strong and positive impact. In fact, if deficit budget increase by 1 percent it will increase
general price level by 6-7 percent [Agha and Khan (2006)]. To fill up the gap the government either
prints or issue more notes [Sergent and Wallace (1981)] or finance it by borrowing from banks. This
action of the government increases the supply of money in the country and hence leads to inflation.
Increase in cost of production leads to increase in the prices of goods which results inflation.

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Production cost may increase due to increase in labor cost. When labor cost increases, it leads to
increase in cost of production which eventually passed on to the consumer in the form of inflation
[source: whisper from wall streat.com]. Capitalism is also considered as a cause of inflation because it
enables rich to get richer at the expense of the poor. Due to natural disaster like, earth quake, flood etc
production will be decreased and demand of that product will become high and this demand-supply
gap will lead to inflation.
Inflation expectations are also a driver of inflation in country [Hassan, Khan, Pasha, and
Rasheed (1995)]. It is observed that economic agents can play important role in controlling prices if
they do not consider the inflation factor while making decisions. If we maintain a tight and efficient
monetary policy for adequately long period, we can control the inflation no matter how deep rotted it
may be [Friedman (1963)]. In Pakistan Exchange rates and inflation rates are systematically related
[Choudhry and Khan (2002)]. In previous studies, the relationship of Growth and inflation show
contradictory results. A positive relationship by Agha &Khan (2006), Thirlwall and Barton (1971) and
a negative relationship by Alexander (1997) while no relationship by Bruno and Easterly (1996). In
Pakistan growth and inflation are strongly related. In fact general prices of commodities will reduced
by 4.6% if GDP increased by 10% [Khan and Qasim (1996)].

3. What are the Consequences of this High Inflation?

Is inflation always bad? There are two schools of thoughts in this regard. Cecchetti (2000) is of the
view that even moderate inflation in the country spoils the real growth of the economy as inflation
brings uncertainty and reduces the real income. But consider that inflation is not always bad. They
argued that if inflation is reasonably high i.e. 3% - 6%, then it will have positive impact on the
economy. The reasonable high rate of inflation will result in increase in investment, flourishing
economy and increase in wages and salaries. Inflation rate, if grown reasonably, will increase the
wages and salaries consequently the purchasing power of the people will increase and hence
manufacturer will manufacture more goods to cope the demand and consequently production will be
increased. If the profit or revenue is more than our expenses than we can save a lot of money which can
be reinvested [Hassan, Khan, A. Pasha, and Rasheed (1995)]. But if inflation goes beyond the
reasonable limits then it results in negative or even adverse effects. Growth rate of the economy, the
most vulnerable group-the poor, value of money and the development of financial sector are severely
affected by high inflation rate.
Inflation rate determine the growth rate of the economy [Kormendi and Meguire (1985),
Cardoso and Fishlow (1989), De Gregorio (1991), Fischer (1991), Rubini and Sala-i-Martin (1992)].
The trade-off between growth rate and inflation is very hot topic of debate in Pakistan. In fact the
growth rate of the economy will be decreased by 1.7% points, if inflation increased to 40% from 20%.
This difference of 1.7% is in reality is the difference between stagnation and persistence growth of the
economy. Barro in 1995 also studied the relation between growth rate of economy and inflation and
found a negative relation. The relation between money growth and inflation is also of significant
importance. Growth rate of money supply and inflation are positively related i.e. more inflation means
more supply of money in the economy consequently opportunity cost of keeping cash balance
increases [Tobin (1965)]. Sidrausky (1967), Brock (1974) and Stockman (1981) found money as super
neutral in relation to inflation. In Pakistan, the inflation is not a monetary phenomenon. High rate of
inflation results in reduction in value of money, which is a medium of exchange. This reduction will
make the gains and losses uncertain, both for buyers and sellers. The uncertainty in the market
discourages savings and ultimately the investments.
High inflation is like poison to the development of the economy but affect the poor the most.
There are slight options for the poor to camouflage against the inflation as they save in cash or in
deposits with low interest and hold little equity or real assets [Khan and Schimmelpfennig (2006)].
Inflation is fatal for the poor and the people with fixed income as they have to spend major portion of

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their income on food items and the prices of food hold 53% weight in WPI. It is observed that the real
per capita income growth rate showed an increase of 2.8% in the period of less inflation and of 1.5% in
high inflation period. Inflation made the distinction between the poor and the rich more distinct and
hence leaves the poor in worst [Easterly and Fischer (2001)]. Inflation discourages savings as during
the period of high inflation the return on financial assets decreases and thus the most vulnerable to
inflation are the poor. Growth has been found one of the determinants of volatile and high inflation rate
in the country [Khan and Senhadji (2001)]. Low savings means low investment and low investment
result in slow growth of the economy. The role of relative changes in price and optimal allocation of
resources is obscured by inflation. There are two ways of financing of deficit budget. One is financing
thorough banking system. To fill up the gap between the expenditures and the revenue, government
may order the central bank to issue more notes of currency. These new notes will result in increased
supply of money in the market and hence inflation [Agha and Khan (2006)]. As Pakistan haven’t
enough reserves to back up the new notes it result in devaluation of currency. The other option is
borrowing from banks which led to high interest bearing debt and hence the general prices of
commodities effected [Agha and Khan (2006)].
The second method of Financing of deficit budget is other than the borrowing from banks and it
is traditionally considered as less inflationary but it may result in unsympathetic connotation for
Domestic debt persistence. The government of Pakistan has been financed the deficit debt by NSS
which escort non-bank debt to non-persistent level. The borrowing became costly due to high servicing
of 18% consequently increase the fiscal debt and money creation in the country [Agha and Khan
(2006)]. Inflation effect the business situation in the economy as corporations are not in a condition to
think about their future. Businessmen, companies are not able to know the market demand if inflation
prevailing in the economy .Manufactures increase their cost of goods because price rise to every goods
and commodity in the economy. The contractors or investors hesitate to invest in such economy and
avoid making long term investment in such country. Inflation adjusted returns: the nominal interest rate
minus inflation rate, every investor thinks about the return from which inflation should be subtracted
before making an investment. Sometimes inflation rate is higher as we compared to the nominal
interest rate. Investors always consider the inflation because inflation eats their profit.

4. Conclusion
Pakistan has experienced the drastic inflation rate of 25.33% in august 2008 & lowest inflation rate of
1.41% in July 2003 which is a record in Pakistan history. In Pakistan, 2003-2010, the average inflation
is recorded as 10.15% which is quite high. Pakistan has given warning by economists that if inflation
would not be controlled now then Pakistan will go into hyperinflation stage. It is concluded that if
inflation rate grow rapidly it is good for our economy but up to a certain point. This inflation rate may
be between 3 or 4 or maximum 8%. This inflation rate has a positive impact for our society nationally
and internationally. Because it enables that economy flourish and increase in investment. In this way
salaries and wages rate will be increased. But if the inflation keep on increasing in such a way that it
cross the positive limit which is of maximum 8% than the inflation will be harmful for economic life.
Inflation is considered as one of the major obstacle in the development of any country. Inflation occurs
when the balance between aggregate demand and aggregate supply is disturbed which can be due to
any reason like due to sick industrial units, energy crisis, material shortage, increase in money supply,
foreign remittance, deficit budgeting etc. There are many other factors like indirect taxes, high prices
of agricultural support, currency devaluation, rise in utility prices, rise in salaries and infrastructural
problems, which contribute to high inflation rate. The difference between imports and exports i.e.
balance of payment also causes inflation in Pakistan [Khan and Qasim (1996)]. Economists and
authors include; growth of money [Khan and Qasim (1996), Bilquees (1988), Hussain (2006)], rate of
interest, the GDP (real), the rate of exchange and supply side like wheat supply (by some authors) as
monetary factors which are the main determinants of inflation in the Pakistan. Political instability

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government crises are the reasons behind inflation [Aisen and Veiga (2006)]. Deficit budget and
inflation in developing countries have strong and positive impact [Chaudhary and Ahmad (1995),
Catao and Terrones (2003) and Shabbir and Ahmed (1994)]. In fact, if deficit budget increase by 1
percent it will increase general price level by 6-7 percent [Agha and Khan (2006)]. Inflation also
affects interest rate in different sector of the economy. Bank and other financial institution charge
higher fees. Inflation also effect the foreign exchange rate & many investors avoid to invest in the
country where inflation rate is very high. Also Transaction fees and other costs will rise as there is
uncertainty about the price.
Inflation is fatal for the growth of the economy and financial sector but it affect the poor most
[Khan and Schimmelpfennig (2006)]. High rate of inflation results in reduction in value of money,
which is a medium of exchange. This reduction will make the gains and losses uncertain, both for
buyers and sellers. All the leading central banks of the world are agreed on this point that stability in
the prices is the main goal of monetary policy [policy [Blejer, et al. (2000)] and they are strongly
committed and accountable to lowering the inflation rate in the economy. Government can control the
inflation by demand management policies which include minimize the borrowing and deficit budget,
pacing the growth of money supply with the growth of nominal GDP and by maintaining fair rate of
currency depreciation [Hasan, Khan, Pasha, and Rasheed (1995)]. Although total subsidies are declined
to Rs.295.20 billion from Rs.40.48 billion but to control the inflation government has to stop the
subsidies to the agricultural sector.
The State Bank of Pakistan (the Central Bank) has the clear authorization to guarantee price
stability and promote growth in the country. Canada and New-Zealand made the central bank
independent to control the inflation with a clear mandate to stabilize the general prices in the country.
For this purpose of constraining the inflation rate within the target level, money supply has been used
by SBP as an instrument. But it is quite clear from the consistent rising inflation rate in the country that
government is unable to stop this menace of inflation. It is quite clear from the statistics that
government is unable to achieve its targeted level for consecutive four years from 2002 to 2005 and
estimated inflation tax was Rs. 61928 which was 0.98% of the GDP in 2005. This whole mess was due
to weak monetary policy. Inflation is a gigantic problem and we cannot control the inflation very easily
as It is very dynamic in nature. A macroeconomic policy to avoid high inflation is one of the best
recommendations economists can make. It can be controlled through; Monetary measures, fiscal
actions, increasing tax rates, imposing high custom duty on imports, political stability, encouraging
saving habits among people & other policies decisions. Government should encourage domestic
production rather than imports of luxury items. These imports should be of needed goods rather than
luxury items. Foreign investments must be maximized to increase in GDP. There must be a strong
monetary policy by SBP to control the money supply in economy from development countries. An
increase in the reserve ratio means that the scheduled banks are required to keep larger reserve with the
central bank. This reduces the deposits of the banks and thus limits their power to create credit.
Restriction on credit extension will control inflation and money supply. Saving is one of the best ways
of reducing the level of prices. The banks can start saving scheme to collect deposits from general
public. People will deposit their money in the saving accounts and they will have less money to spend.
By improving the availability of goods and services and growth in GDP will put the pressure, of high
price level, down [Hasan, Khan, Pasha, and Rasheed (1995)].
The government should reduce unnecessary expenditure in order to control the inflation. In this
way the gap between the expenditure and income will reduce and there will be no need of new note
issue. Foreign aid increases the aggregate demand of economy. Foreign aid and loans should be
allocated in a systematic way so that balanced growth could be achieved in the economy. It is observed
that economic agents can also play important role in controlling prices if they do not consider the
inflation factor while making decisions. If we maintain a tight and efficient monetary policy for
adequately long period, we can control the inflation no matter how deep rotted it may be [Friedman

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(1963)]. Hence this study explores the history of inflation along with the causes, effects and
suggestions regarding the control of this gigantic problem.

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