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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. Our aim is to find the determinants of inflation, its causes, situation in Pakistan, and measures to control it. Limitations are defined as per actual. In this report we reviews the literature defining inflation as “too much money chasing too few goods. This explains the view point of different researchers in determining the causes of inflation and establishing links of different variables with inflation such as fiscal and monetary policies, unemployment, demand pull and cost pull factors that affect inflation. We also identify monetary shocks, inflation expectations, nominal exchange rate, and price of imports, exogenous supply shocks and fiscal policy shocks as determinants of inflation. The inflation gives patterns in Pakistan from 2000’s to 2009, which reports the last five years as highly inflationary due to expansionary monetary policy and high oil prices.The sustained level of high economic growth over the year has increased the level of income, which has resulted in a surge in domestic demand. 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. Government actions are not useful, as we are not seeing any difference in the inflation rates.
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. The high levels of inflation reflect a volatile economy in which money does not hold its value for long. The level of inflation in Pakistan has been persistently rising since Partition. scale back production to check their costs (resulting in lay-offs). Introduction: Our study will be focused at the various aspects of inflation in Pakistan from a local and global perspective. . It can also be described as a decline in the real value of money—a loss of purchasing power. investment should be given preference in consumer goods instead of luxuries. etc. Workers require higher wages to cover rising costs. prices of imported goods. Many such problems have been. The factors leading to high levels of inflation include deficit financing. Inflation or price inflation is a rise in the general level of prices of goods and services in an economy over a period of time. black money. and developed countries should be requested for financial and managerial assistance. or fail to invest in future production. increase in wages. Producers in turn may raise their selling prices to cover these increases. foreign investment should be attracted. foreign economic assistance. and still are. Agriculture sector should be given subsidies. population explosion. being faced by Pakistan.Domestic production should be encouraged instead of imports. devaluation of rupee. foreign remittances. and are disinclined to save.
But we don’t subscribe to the classical view that when there is full employment we can say that when money supply increases it results partly in the increase of output (GNP) and it partly feeds the rise in prices and when the supply of output lags far behind. if there is increase in supply of money. The number of dollars in circulation exceeds the amount of goods and services available for purchase. 4 The increase in the cost of living (prices for goods and services). the rise in prices is described as inflationary. resulting in a decline in a currency's purchasing power.DEFINITION True inflation begins when the elasticity of supply of output in response to increase in money supply has fallen to zero or when output is unresponsive to changes in money supply. inflation results in a decrease in the dollar's value. When there exists a state of full employment. alternatively. When economists speak of inflation as an economic problem. they generally mean a persistent increase in the general price level over a period of time.) . a decrease in purchasing power of the dollar. The following definitions are taken from the web to simplify the meaning and concept of inflation. Inflation is measured as an annual average by the CPI (Consumer Price Index. Inflation is usually measured as a percentage increase in the consumer price index. The average rate of increase in prices. 1 2 3 An increase in the general price level of goods and services. the conditions will be clearly inflationary.
the price will inevitably increase. When this happens across the entire economy for all goods. When many individuals are trying to purchase the same good. electricity. COST-PUSH INFLATION Cost push inflation is a type of inflation caused by substantial increase in the cost of important goods or services where no suitable alternative is available.DEMAND-PULL INFLATION AND COST-PUSH INFLATION Demand-pull-inflation is a result of strong consumer demand. CAUSES OF INFLATION 1 2 3 4 5 6 7 8 9 Decelerating Economic growth Loose monetary policies Output set-backs Higher duties and taxes Depreciating Pak Rupee Frequent adjustments in the administered prices of Gas. Oil and Lubricants) products Frequent adjustments in support price of wheat 10 Political instability . A phenomenon in which the general price levels rise due to increase in the cost of wages and raw material. it is known as demand-pull-inflation. POL (Petroleum.
The SPI shows the weekly change of price of 53 selected items of daily use consumed by those households The SPI is based on the prices prevailing in 17 major cities and is computed for the basket of commodities being consumed by the households belonging to all income groups combined. these prices are collected from wholesale markets as well as from mills at organized wholesale market level. the main focus is placed on the CPI as a measure of inflation as it is more representative with a wider coverage of 374 items in 71 markets of 35 cities around the country. The CPI is the main measure of price changes at the retail level.1 PRICE INDICES IN PAKISTAN Four different price indices are used in Pakistan over the course of fiscal year. . the Wholesale Price Index (WPI). In Pakistan. The WPI covers the wholesale price of 106 commodities prevailing in 18 major cities of Pakistan. It covers the retail prices of 374 items in 35 major cities and reflects roughly the changes in the cost of living of urban areas.INFLATION IN PAKISTAN 3. The WPI is designed for those items which are mostly consumable in daily life on the primary and secondary level. the Sensitive Price Index (SPI) and the GDP deflator. namely: the Consumer Price Index (CPI).
91 6.10 6.92 7.96 WPI 6.83 11.58 6.94 10.21 2.82 11.77 8.26 27.75 10.43 20.01 24.54 3.Most Commonly Used Price Indices of Pakistan Features: Name Cities Covered Markets Covered Items Covered Commodities Covered Number of Commodity Groups CPI 35 71 374 92 10 SPI 17 53 53 - WPI 18 18 425 106 5 Annual Rate of Inflation (Percentage) in Pakistan for Period 2000-2009 Period 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2010 CPI 4.28 7.41 3.10 4.57 7.08 5.55 7.02 10.03 30.98 Table 3 Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 1990-2008 .77 SPI 4.37 3.84 3.57 9.
which measures inflation in the whole of the domestic economy. The most well known measures of Inflation are the CPI which measures consumer prices. and the GDP deflator.3. .9 INFLATION DURING 2010 The inflation rate in Pakistan was 13.2.04 percent in March of 2010. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. This page includes: Pakistan Inflation Rate chart. historical data and news.
Higher duties and taxes 5. Loose monetary policies 3.0 percent and 3. A depreciating Pak Rupee 6.Inflation in Pakistan over the last 18 years had been fluctuating between 13.1 percent. electricity. Decelerating economic growth 2. Output set-backs 4. Frequent adjustments in the administered prices of gas. Political instability . POL products as well as the support price of wheat 7. This was mainly due to: 1.
4 3. the country had very low levels of food inflation. averaging 12. and a rise in international prices including the oil prices. respectively against the overall CPI inflation of 11. The inflation rate.6 2.1 percent by 200203. The inflation rate had come down to 7. Inflation had been contained during the period of 2000-07 despite tremendous growth through a combination of tight monetary policy and the resolving of several supply bottlenecks. Table 5: Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 1990-2008 Year 2000-01 2001-02 Overall CPI 4. reaching as high as 9.5 Non-Food 5.1 4. strict budgetary measures and depressed international market prices kept domestic prices in check.7 percent in 1998-99.Both the food and non-food inflation contributed to the persistence of double-digit inflation during the period from 1990-1997. During this time period.5 percent. and appreciation of exchange rate. mainly due to extremely high food inflation of 16. the price pressure started to moderate from 1997-98 onwards as an improved supply position. a reduction in duties and taxes. which was at 5. was further reduced to 3. This low level of inflation was supported by strict fiscal discipline.3 .5 Food 3. as domestic supply was plentiful as were international stockpiles.4.7 percent. an output recovery. Nevertheless.3 percent in June 2005. the lower monetization of the budget deficit.2 and 10.3 percent over the period July. The pressure on prices intensified in 1994-95 when inflation went up to 13 percent. shortages of wheat. Inflation began to pick up after the first quarter of 2003-04.April 2007-08.8 percent at the end 2006-07 but has since steadily risen to 10. It had a variety of reasons including a rise in the support price of wheat. Despite these measures taken by the government over the last couple of years. inflation has steadily increased this past fiscal year due to soaring international food and energy prices.
7 6.5 6.2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Average 1990-97 Average 1998-2000 Average 2000-08 3.8 10.6 7.9 6 12.8 10.5 3.3 11.3 7.4 2.2 3.3 15 12.1 5.2 5.6 Source: Federal Bureau of Statistics .6 6 6.6 9.9 7.4 5.7 6.9 10.3 7.1 8.1 4.
9 per cent said that these will increase at the same rate and only 3. . The recently conducted survey by PIDE showed that vast majority of the respondents believe that law and order is one of factors causing rise in inflation and they expect that inflation will rise in future. D teachers in universities and members of Pakistan Society of Development Economy. cost push and structural factors were responsible for current inflation in the country. Majority of the respondents said that consumer prices will increase more rapidly in the remaining period of the current fiscal year. The respondents included Ph. The results of the survey show that demand pull.9 per cent think that consumer prices will remain the same. while 28.Table 6: Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 1990-2008 (July-April) ISLAMABAD: A survey conducted by Pakistan Institute of Development Economics (PIDE) over ‘Inflation expectations’ indicates that the government policies were not sufficient to curb inflation.
9 per cent say that higher rates are best for the economy.1-NON FOOD AND NON ENERGY . 4. the majority of the respondents said that coordinated monetary and fiscal polices were required to control inflation. The PIDE survey said that cost push factor is more responsible for causing inflation.5 per cent of the respondents are in favour of low interest rates. while 22 per cent think that increase in oil prices has accelerated the current inflationary trend and for 14. while 11. The professionals among the respondents predict that increase in food prices is the main cause of inflation. However the majority of the respondents said that they expect dollar rates to decline in coming months. while for 13. However. all the three factors are contributing about 56. Collectively.50 per cent. The respondents indicated that average inflation during Jan to June 2010 is expected to be 16. 52.1 per cent.5 per cent. The survey showed that the average expected economic growth rate for next six months would be 2.3 per cent of those surveyed utility prices are responsible for the current inflation.08 per cent.6 per cent of the respondents said that the government policies were not effective to enhance growth. Three per cent of the respondents feel that the inflation would decline and for four per cent it would remain the same.8 per cent the policies are useful.9 per cent respondents expect that the inflation rate during current year will be higher than the target of 9 per cent. The contribution of cost push in inflation is 29.1 per cent to the current inflation rate. The survey said that 67.The survey report said that 91. followed by demand pull factor 14 per cent and structural factor 13.
respectively) and higher international oil prices would put upward pressures on the headline inflation going forward.Pakistan: CPI inflation grew 10. "Inflation peaked to all-time high levels in the past fiscal year and since the decline in it.52 percent. "Lower headline and core inflation numbers may give the State Bank some room for slight monetary loosening in its policy announcement at the end of this month".04 percent.34 percent in December of last financial year. He.34 weightage in CPI basket was lower by 1.7 percent on yearly basis (approximately 0. The Consumer Price Index (CPI) was recorded rising 23. The growth was much below the high inflation increase of 24." analysts added.14 percent declined by 13. Inflation number dipped 0.24 percent.52 percent in December of the current fiscal year over the corresponding month of previous year. Federal Bureau of Statistics reported on Monday. fuel and lighting 6. On the other hand.6 percent on yearly basis (approximately 0.5 percent on monthly basis) in December 2009 as compared to 10.08 percent.92 percent on yearly basis. The perishable food items with a weight of 5. said Ismail Iqbal Securities analyst Abbas Zulfiqar Ali. core inflation (non-food and non-energy) grew by 10.75 percent on monthly basis while it was up by 10. eased off against the soaring inflationary trends of last fiscal year. House rent index grew 14. the comparison with the past trends were reflected in the positive side.49 percent and health expenses also increased 5.23 percent on yearly basis. Analysts commenting on the inflationary trends said that apart from other factors high base affect has still its positive impact on the declining growth of inflation. In the first half of 2009-10. however growth slipped down to just 10. During the period under review.8 percent on monthly basis) in November 2009. food inflation . The increase however.52% in Dec on yearly basis The headline inflation grew by 10. however.31 percent over the corresponding half of previous fiscal.31 percent in the same half of previous year.having 40. . transport and communication 6. Recent weekly inflation numbers (SPI) also indicates towards resurgence of inflationary pressures. said that recent increases in electricity and gas tariffs (CPI index weightage 4.63 percent. mainly on the back of a huge decline in food inflation.80 percent on monthly basis whereas the non-perishable index increased 0.21 percent. education expenses rose 13. headline inflation increased 10.49 percent in December over the preceding month November of the current fiscal year.36 percent and 2.
This page includes: Pakistan GDP Growth Rate chart.2-IMAPACT OF INFLATION ON GDP PAKISTAN GDP GROWTH RATE Pakistan Gross Domestic Product (GDP) expanded 2. However. IMF-approved government policies.27% of the world economy. bolstered by foreign investment and renewed access to global markets.00% over the last 4 quarters. 4. This reflects the rebound in the prices of fuel and a larger second round impact of the increases in electricity tariffs. Pakistan's economy has suffered in the past from decades of internal political disputes. historical data and news. a fast growing population. "The inflation outlook on yearly basis has been revised from 9 to 11 percent. ongoing confrontation with neighboring India. mixed levels of foreign investment. The Pakistan Gross Domestic Product is worth 168 billion dollars or 0. have generated solid macroeconomic recovery during the last decade. and a costly. . according to the World Bank.The International Monetary Fund in its review on the Pakistan's economy also revised its projection upward on the inflation for the current fiscal to 11 percent from the earlier nine percent." IMF said.
no doubt. direct and indirect taxes and wheat support price have a great impact on inflation. the largest contributors to inflation.3-RELATIONSHIP OF FISCAL POLICY WITH INFLATION There exists a strong relationship of fiscal policy with inflation. Rising oil and food prices in the international market have been. Emphasis on direct taxes was not given in order to control the inflation. exchange rate. over the last few years inflation has been caused by excessive fiscal deficit. private sector credit. . tax revenue. Different studies have shown that factors such as demand relative to supply. Imports went up largely due to rising demand while production of local goods remained unsatisfactory. In Pakistan.4. Indirect taxes by the government in the form of sales tax have pushed the prices of commodities upwards.
the trade off for Pakistan would not be affordable since inflation is already very high while growth is still at a respectable level. it carries the responsibility of fulfilling the aspirations and promises to the nation. The Government has taken various steps to release demand pressures on the one hand and enhance supplies of essential commodities on the other. The Government has its policy objective to ensure high growth while keeping inflation in check. and international commodity prices remain high. directly contributing in reducing poverty.4-GOVERNMENT AND SBP MEASURES New democratic Government has entered FY09 with heavy overhang of the last year’s macroeconomic imbalances in the economy. The trade offs are not easy and global economic environment continues to be fraught with uncertainties though some trends are quite clear: global growth has slowed down. international liquidity squeeze persists and Pakistan sovereign rating prevents tapping international markets. At the same time.5-PAKISTAN INTEREST RATE .4. 4. Growth creates more jobs and increases incomes. Both the Government and central bank have taken a set of fiscal and monetary policy measures over the term of FY08 to curb macroeconomic imbalances. While other countries have greater room to support growth at the cost of higher inflation.
interest rate decisions are taken by the State Bank of Pakistan.50 percent.Pakistan benchmark interest rate stands at 12. This page includes: Pakistan Interest Rate chart. The official interest rate is the discount rate. historical data and news. In Pakistan. .
Inflation is one of the obstacles on the way of development. Domestic production should be encouraged instead of imports. Agriculture sector should be given subsidies. and developed countries should be requested for financial and managerial assistance. investment should be given preference in consumer goods instead of luxuries. . 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. foreign investment should be attracted. it has squeezed the major part of the population. In Pakistan. It needs to be controlled by strategic planning.
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