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Inflation

Ahmed Mujahid

Usama Hassan

Arbab sikander

Saad Ahmed
What is Inflation?
What causes Inflation?
Causes of Inflation in Pakistan
Facts & Figures
Recommendations
Conclusion
Types of Inflation
Wage Inflation
Cost-push Inflation
Pricing Power Inflation
Sectoral Inflation
What is Inflation?
In economics, inflation is a rise in the
general level of prices of goods and services
in an economy over a period of time. When the
general price level rises, each unit of currency
buys fewer goods and services

Inflation is also a decline in


The real value of money
A loss of purchasing power
Wage Inflation
Wage inflation is also called as demand-pull or
excess demand inflation.
This type of inflation occurs when total demand
for goods and services in an economy exceeds
the supply of the same.
When the supply is less, the prices of these
goods and services would rise, leading to a
situation called as demand-pull inflation. This
type of inflation adversely affects the market
economy.
Cost-push Inflation
As the name suggests, if there is increase in
the cost of production of goods and services,
there is likely to be a forceful increase in the
prices of finished goods and services.
A rise in the wages of laborers would raise the
unit costs of production and this would lead to
rise in prices for the related end product.
Pricing Power Inflation
Pricing power inflation is more often called as
administered price inflation.
 This type of inflation occurs when the
business houses and industries decide to
increase the price of their respective goods
and services to increase their profit margins.
 A point noteworthy is pricing power inflation
does not occur at the time of financial crises
and economic depression, or when there is a
downturn in the economy.
Sectoral Inflation
This is the fourth major type of inflation.
The sectoral inflation takes place when there is an
increase in the price of the goods and services
produced by a certain sector of industries.
An increase in the cost of crude oil would directly
affect all the other sectors, which are directly
related to the oil industry. Thus, the ever-
increasing price of fuel has become an important
issue related to the economy all over the world.
When the price of oil increases, the ticket fares
would also go up. This would lead to a widespread
inflation throughout the economy, even though it
had originated in one basic sector
Measures of Inflation
There are many different ways to measure the
inflation in an economy.

A chief measure of general price-level


inflation is the general inflation rate, which is
the percentage change in a general price
index (normally the Consumer Price Index)
over time.
What causes Inflation?
There are many causes for
inflation, depending on a
number of factors
What causes Inflation?
Inflation can happen when governments
print an excess of money to deal with a
crisis. As a result, prices end up rising at an
extremely high speed to keep up with the
currency surplus. This is called the demand-
pull, in which prices are forced upwards
because of a high demand.
What causes Inflation?
Another common cause of inflation is
A rise in production costs, which leads to an
increase in the price of the final product.
If raw materials increase in price, this leads to
the cost of production increasing, which in
turn leads to the company increasing prices to
maintain steady profits. Rising labor costs can
also lead to inflation. As workers demand
wage increases, companies usually choose to
pass on those costs to their customers.
What causes Inflation?
Inflation can also be caused by
International lending and National debts.
As nations borrow money, they have to deal
with interests, which in the end cause prices
to rise as a way of keeping up with their
debts.
 A deep drop of the exchange rate can also
result in inflation, as governments will have
to deal with differences in the import/export
level.
What causes Inflation?
Inflation can be caused by federal taxes put on
consumer products such as cigarettes or fuel.
As the taxes rise, suppliers often pass on the burden
to the consumer; the catch, however, is that once
prices have increased, they rarely go back, even if
the taxes are later reduced.
Loans are the cause for inflation, as governments
must both recoup the money spent and repay the
funds borrowed from the central bank. This affects
everything from international trading to labor costs to
product demand, so in the end it always produces a
rise in prices.
Causes of Inflation in
Pakistan
Inflation is not something which happens
overnight
The past mistakes have led to high inflation
rate in Pakistan
Lets go back to
the past and
see what went wrong
Causes of Inflation in
Pakistan
In case of Pakistan, annual inflation was
above 11 per cent in the 11 of the past 32
years
Average real per capita income growth was
2.8 per cent in years having less than 11 per
cent inflation as compared to the years of
high inflation with an average of 1.5 per cent
Causes of Inflation in
Pakistan
During the first four years of the new
millennium inflation remained under five per
cent and then suddenly increased to 9.3 per
cent in 2004-05 and settled to eight per cent
in 2005-06.
The growth in wheat prices and exchange rate
was low in some years and high in others.
Causes of Inflation in
Pakistan
The 1980s were a decade of relatively low
average inflation (7.2 per cent).
Private sector borrowing, exchange rate
depreciation and adaptive expectations were
the main factors behind this growth in
consumer prices.
Denationalization enlarged the private sector
and, as a consequence, private sector
borrowing increased during this period.
Causes of Inflation in
Pakistan
In 1990s, the mainstream liberalization policies
picked up momentum.
Frequent changes in the government,
inconsistent policies, nuclear explosion and
other dramatic political and economic
developments put upward pressure on prices.
Average inflation rate increased to 9.6 per cent.
Increase in wheat procurement prices,
government and private sector borrowings,
exchange rate depreciation and adaptive
expectations were the main factors behind the
surge in inflation rate.
Causes of Inflation in
Pakistan
During 2001-04, inflation was very low.
The support price of wheat was not raised during 2001-03.
CPI shot up again in 2004-05 when inflation reached 9.3 per
cent.
It dropped slightly to eight per cent in 2005-06.
 Inflation expectations alone explain 45.73 per cent of the
inflation in 2005-06 and 31.1 per cent in 2004-05.
This critical role of inflation expectations can be explained
by emergence of the phenomena like assets price hikes,
and surge in house rents
Causes of Inflation in
Pakistan
In 2004-05, two other important factors for
inflation were government sector borrowing
and support/procurement price of wheat,
contributing 17.6 per cent and 11.8 per cent
respectively.
The government taxes did not cause any
significant rise in prices in 2004-05 and 2005-
05. This seems logical since there has been no
change in the tax to GDP ratio over the last
few years.
Facts & Figures
 Last month, the inflation rate was 11.2%
 The food inflation was 19.1 %
 Prices of food items like chicken, pulse gram, sugar, milk and wheat
flour was on rise.
 House Rental inflation was 18.5%
 Inflation in major cities declined during March 2010, compared to
February 2010, but it remained higher than the level recorded in
these cities during the same month last year.
 Nawabshah topped the list of high inflation cities and cities like
Islamabad, Lahore and Faisalabad were among the low inflation cities
Based on the report of
State Bank of Pakistan
14
12
10
8
6 Inflation Rate

4
2
0
years 2006 2008 2010
Survey
Survey
survey
Recommendations
The Government should revisit the economic policies
The State Bank of Pakistan should decrease the high
interest rate in an effort to decrease the inflation.
The Government should stop borrowing money from the
State Bank.
The Government should reduce or remove the taxes on
food items in order to give relief to the poor people.
The Government should take suitable measures to increase
the direct foreign investment.
Inflation is not something which happened
overnight.
There should be a political stability in the country
and only then we can improve the state of our
economy.
If our economy is on the right track only then we
can fight the menace of terrorism and extremism.
If our economy is on the right track only then we
can solve all the problems we have in our society.
Thanks