Table of contents. Definition 3. Introduction 4. Types of inflation 6. Latest trend of problems 14. Causes of inflation 16

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1 Table of contents PARTICULARS PAGENUMBER Definition 3 Introduction 4 Types of inflation 6 Latest trend of problems 14 Causes of inflation 16 Methods to control (Solutions) 19 Conclusion 20

2 Submitted by: Group Members Roll # 27 Hassaan Shahid (Group leader) Roll # 21 Saba Farooq Roll # 17 MubashirShakoor Roll # 51 M.Aaqibmajid Roll # 57 Ahmed Hussain

3 Submitted to: MAM.ANUMIMRAN Course: MSc. (A/F) Morning Semester: 3 rd Summary: Controlling inflation is one of the biggest challenges faced by the macroeconomic policymakers in Pakistan. This report is aimed at highlighting the main sources of inflation in the economy of Pakistan. Findings of this study reveal that the one percent rise in the long run money supply, exchange rate, total reserve, and the gross national expenditure change inflation by 0.16, 2.12, 0.36, and 1.78 percent points respectively. Keywords: Determinants of Inflation, trends, causes, solution. Definition: Inflation is a situation whereby there is a continuous and persistent rise in the general price level.

4 According to Meyer: An increase in the prices that occurs after full employment has been attained. According to Crowther: In the state of inflation the prices are rising i. e., the value of money is falling. Introduction: Elaboration: "A certain amount of money today is equivalent to a larger amount of money in the future because the money can be invested." We called this effect the time value of money. Inflation is different. Inflation means that an amount of money today is worth more than the same amount in the future because of inflationary increases in Price.

5 The continual upward movement in price level in the economy is called inflation. During the inflationary period money loses its value. The problem of soaring inflation has critical significance in Pakistan economy with social implications. According to economics theory, the inflation rate has direct relation to gross domestic product (GDP), fiscal deficit, government expenditure, tax revenue, money supply, exports, exchange rate, prices of imports, interest rate and others Several studies have been conducted to explore the causes of inflation during the 1990 s. Generally, monetary growth, public policy, administered prices, rise in the prices of imported goods, inflationary expectations and output growth are termed as the determinants of inflation in Pakistan. However, their actual contribution towards inflation is debatable. One group of economists considers inflation a monetary phenomenon, while the other assigns more weightage to rise in administered prices and increase in prices of imported goods as determinants of inflation. Overall,

6 host of factors from both the demand and supply side are responsible for the recent price spiral in Pakistan. Types of inflation Coverage or scope: Comprehensive or Economy-Wide Inflation, and Sporadic Inflation. Time of occurrence: UNCERTAINITY: War-Time Inflation, Post-War Inflation, and Peace-Time Inflation. Government's reaction or control: Open Inflation, and Suppressed or Repressed Inflation. Rising prices: Creeping, Mild or Low Inflation, Chronic or Secular Inflation, Walking or Trotting Inflation, Moderate Inflation,

7 Running Inflation, Galloping or Jumping Inflation, and Hyperinflation.

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9 Based on coverage or scope: Comprehensive Inflation: When the prices of all commodities rise in the entire economy, it is known as Comprehensive Inflation. Economy-Wide Inflation is it s another name. Sporadic Inflation: Time when prices of only a few commodities in some regions (areas) rise, it is called Sporadic Inflation. It is sectional in nature. For example, increase in food prices due to bad monsoon (winds that bring seasonal rains in India). Based on time or period of occurrence: War-Time Inflation: Inflation that takes place during the period of a warlike situation is Wartime Inflation. During war, scant productive resources are all diverted and prioritized to manufacture military goods and equipments. Overall it results in very limited supply and extreme shortage (low availability) of resources (raw materials) to produce

10 essential commodities. Production and supply of needed goods slow down and can no longer meet the soaring demand from people. Consequently, prices of necessary goods keep on rising in the market, resulting in Wartime Inflation. Post-War Inflation: Inflation that takes place soon after a war is a Post-War Inflation. After the war, government controls are relaxed, resulting in a faster hike in prices than what experienced during the war. Peace-Time Inflation: When prices rise during the peace period, it is known as Peacetime Inflation. It is due to enormous government expenditure or spending on capital projects of a long gestation (development) time. Based on Government s reaction or control: Open Inflation: When government does not attempt to restrict inflation, it is known as an Open Inflation. In a free-market economy, where prices

11 are allowed to take its course, Open Inflation occurs. Suppressed Inflation: When government prevents the price rise through price controls, rationing, etc., it is known as Suppressed Inflation. Repressed Inflation is its another name. However, when government removes its controls, it becomes Open Inflation. It then leads to corruption, black marketing, artificial scarcity, etc. Based on rising prices: Creeping Inflation: When prices are gently rising, it is referred as Creeping Inflation. It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation. According to R.P. Kent, when prices rise by not more than (i.e. Up to) 3% per annum (year), it is called Creeping Inflation. Chronic Inflation: If creeping inflation persists (continues to increase) for a longer period, then it is often called as Chronic or Secular Inflation. Chronic-Creeping Inflation can be either Continuous (which remains consistent without any downward

12 movement) or Intermittent (which occurs at regular intervals). It is named chronic because if an inflation rate continues to grow for a longer period without any downturn, then it possibly leads to Hyperinflation. Walking Inflation: When the rate of rising prices is more than the Creeping Inflation, it is known as Walking Inflation. Trotting Inflation is it s another name. When prices rise by more than 3%, but less than 10% per annum (i.e., between 3%, and 10% per annum), it is called as Walking Inflation. According to some economists, we must take Walking Inflation seriously as it gives a cautionary signal for the occurrence of running inflation. Furthermore, if, not checked in due time, it can eventually result in Galloping Inflation. Moderate Inflation: Prof. Samuelson clubbed together concept of Creeping and Walking inflation into Moderate Inflation. It happens when prices rise by less than 10% per annum (single digit inflation rate). According to him, it is a stable inflation and not a serious economic problem.

13 Running Inflation: A rapid acceleration in the rate of rising prices is called Running Inflation. It occurs when prices rise by more than 10% in a year. Though economists have not suggested a fixed range for measuring running inflation, we may consider a price increase between 10% to 20% per annum (double-digit inflation rate) as a Running Inflation. Galloping Inflation: According to Prof. Samuelson, if prices rise by dual or triple digit inflation rates like 30% or 400% or 999% yearly, then the situation can be termed as Galloping Inflation. When prices rise by more than 20%, but less than 1000% per annum (i.e. Between 20% to 1000% per annum), Galloping Inflation occurs. Jumping Inflation is its another name. India has been witnessing it from second five-year plan period. Hyperinflation: It refers to a situation where the prices rise at an alarming high rate. The prices rise so fast that it becomes very difficult to measure its magnitude. However, in quantitative terms, when

14 prices rise above 1000% per annum (quadruple or four-digit inflation rate), it is termed as Hyperinflation. During a worst-case scenario of hyperinflation, the value of the national currency (money) of an affected country reduces almost to zero. Paper money becomes worthless, and people start trading either in gold and silver or sometimes even use the old barter system of commerce. Two worst examples of hyperinflation recorded in the world history are of those experienced by Hungary in the year 1946 and Zimbabwe during under Robert Mugabe's regime. Latest trend of problems: Consumer prices in Pakistan increased by 1.61 percent year-on-year in October of 2015, following a 1.32 percent growth in the previous month, as cost of clothing (+5.11 percent against percent in September) and furnishings and household equipment (+3.86 percent against percent) rose at a faster pace. Additional upward pressure came from: housing and utilities (+5.32

15 percent); education (+8.75 percent) and communication (+0.39 percent). By contrast, prices of food (-0.42 percent) and transportation ( percent) continued to fall. Inflation Rate in Pakistan averaged 7.94 percent from 1957 until 2015, reaching an all-time high of percent in December of 1973 and a record low of percent in February of Inflation Rate in Pakistan is reported by the Pakistan Bureau of Statistics. Actual Previous Highest Lowest Dates Unit Frequency percent Monthly 2007/2008=100 In Pakistan, most important categories in the consumer price index are food and non-alcoholic beverages (35 percent of total weight); housing, water, electricity, gas and fuels (29 percent); clothing and footwear (8 percent) and transport (7 percent). The index also includes furnishings and household equipment (4 percent), education (4 percent), communication (3 percent) and health (2 percent). The remaining 8 percent is composed by: recreation and culture, restaurants and hotels, alcoholic beverages and tobacco and other goods and services. This page provides the latest reported value for

16 - Pakistan Inflation Rate - plus previous releases, historical high and low, short-term forecast and longterm prediction, economic calendar, survey consensus and news. Content for - Pakistan Inflation Rate - was last refreshed on Sunday, November 22, Reasons behind problems: (causes of inflation) Causes of inflation are of two types: A. INCREASE IN DEMAND: 1) Increase in Money Supply The major cause of increase in the price level is an increase in money supply. It may be due to increase in currency or credit money. Increase in the stock of money induces people to demand more and more of goods and services. 2) Increase in Velocity of Money According to the Fisher s Quantity Theory of Money, if there is an increase in the velocity of circulation of money it also leads to inflation. 3) More Investment

17 Investments also play an important role in producing inflation. At the moment of investment the economy s stock of wealth and money expands and it result is in inflation. 4) Non-productive Expenditures Government of Pakistan has to make a lot of nonproductive expenditures like defense etc. Such unproductive expenditures lead to the wastage of economy s precious resources and also lead to inflation. 5) Corruption & Black Money Corruption and black money leads to increase in aggregate demand, which is cause of inflation. These evils increase aggregate demand and import volume. 6) Deficit Financing Deficit financing is another cause of inflation. It increases the money supply and leads to inflation. 7) Foreign Remittances Increase in foreign remittances is increasing the money supply in our country. Increase in money supply leads to inflation. 8) Foreign Aids

18 Foreign aids are also a source of mobilization of resources form rich countries to poor countries. It is also a cause of inflation in Pakistan. 9) Consumption Trends Due to demonstration effect people of our country want to copy the styles of people of rich countries. In this way there is an increase in consumption trends that leads to inflation. 10) Population Bomb Population of Pakistan is increasing day by day. Increasing population is demanding more and it creates inflation. B. DECREASE IN SUPPLY: 11) Slow Agricultural Development Low growth rate of agricultural sector caused in shortage of productivity. It results in low supply and increase in price level. 12) Slow Industrial Growth Our industrial sector is not at developed form due to use of backward techniques of production. Its less production also creates shortage in market and caused in inflation.

19 13) Increase in Wages & Salaries Now labour is demanding more wages and salaries. Increase in wages and salaries leads to increase in cost that increases the prices. On the other hand due to more wages and salaries there is an increase in income and it caused in inflation. 14) Increase in Prices of Imports Increase in the prices of imports also leads to creation of inflation. If there is an increase in the prices of oil and other imported raw material then it will cause to reduction in supply. MEASURES TO CONTROL THE INFLATION Following measures are suggested to control high inflation: 1) Increase in the growth rate of output 2) Government should control the supply of money through effective monetary policy 3) Highly increasing unproductive expenditures must be control

20 4) Government should check the corruption first to eliminate the inflation 5) Control on population is also necessary to control inflation 6) Reduction in budget surplus 7) Reduction in monetary expansion 8) Effective tax system will be helpful to control the inflation 9) Improvement in balance of payment 10) Developments of agricultural and industrial sector will helps to control the inflation. Conclusion: Inflation is everywhere in an economy. Its rate is high in developing countries and is low in poor developed counties. Effective operation of monetary and fiscal policy is essential to control the inflation. In reality, low inflation rate and an upward economic growth is never

21 possible nevertheless, low inflation rate means slow economic growth. Whenever, money is in excess, there is bidding by the consumers due to which cost of goods is escalate.