MBA (R).

INFLATION
Current situtation of Inflation
Gondal,Nabeel.et al. Inflation.
Faisalabad:Agricultural University, 2011. Pp.
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 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. Consequently, inflation also reflects erosion in the
purchasing power of money. A loss of real value in the internal medium of exchange
and unit of account in the economy. A chief measure of price inflation is the inflation
rate, the annualized percentage change in a general price index (normally the
Consumer Price Index over time.

A consumer price index (CPI) measures changes through time in the price level of
consumer goods and services purchased by households.

ACCORDING TO R.P.KENT:
Inflation is nothing more than a sharp upward movement in the price level.

ACCORDING TO W.A.L.COULBOURN:
In inflation, too much money chases too few goods.

ACCORDING TO GARDNER ACKELY:

A persistent and appreciable rise in the general level or average of prices is called
inflation.

ACCORDING TO CROWTHER:
In the state of inflation the prices are rising i.e., the value of money is falling.

ACCORDING TO MEYER:
An increase in the price that occurs after full employment has been attained.

ACCORDING TO MILTON FRIEDMAN:

Inflation is and can only be produced by increasing the quantity of money faster than the
increase in output.

ACCORDING TO KEYNES:
The rise in general price level after full employment had been achieved is called
inflation.
KINDS OF INFLATION
Following are the kinds of inflation:
1. Creeping inflation.
2. Walking inflation or Mild inflation.
3. Running inflation.
4. Galloping or Hyper inflation.
5. Demand pull inflation.
6. Cost push inflation.
7. Mixed inflation or Wage spiral inflation.
8. Open inflation.
9. Suppresses inflation.
10. Profit induced inflation.
11. Budgetary inflation or Deficit inflation.
12. Monetary inflation.
13. Income inflation.
14. Production inflation.
15. Devolution inflation.
16. Imported inflation.

CREEPING INFLATION:
It is a situation where the increase in the price level is very slow. In creeping inflation the
rise in price level is up to 2 % p.a.

WALKING INFLATION OR MILD INFLATION:

When the rate of inflation is reasonable, not too high not too low. The rise in price level
is about 5 % p.a. This type of inflation has healthy effect on economy.

RUNNING INFLATION:
In this type of inflation, the general price level increase more sharply than the previous
type. The rise in price is about 8 to 10% p.a.

GALLOPING OR HYPER INFLATION:

When prices are rising at abnormal high rate, it is called hyper inflation. This type of
inflation was experienced in Germany after second world war. The price level increase
many hundreds time and the purchasing power of people fell to very low level. This type
of inflation is very dangerous.

DEMAND PULL INFALTION:

When inflation is due to excess of demand over aggregate supply, it is called demand
pull inflation. Excess of aggregate demand pulls the price upwards. Aggregate demand
exceeds aggregate supply due to following reasons:
a) Population explosion.
b) Increase in exports.
c) Structural backwardness.
d) Increase in supply of money.
e) Increase in income of people.
f) Mass migration.
g) Wars.

COST PUSH INFLATION:

It means a situation where prices are rising due to increase in the cost of production
even if there is no increase in aggregate demand. Increase in costs pushes the price
upward. Cost push inflation occurs due to following reasons:
a) Increase in wages.
b) Increase the price of raw material.
c) New taxes.
d) Devaluation.
e) Increase in energy prices.

MIXED INFLATION OR WAGE SPIRAL INFLATION:

It is the mixture of demand pull and cost inflation. Originally prices rise due to excessive
increase in aggregate demand. Increase in raises the cost of living of the workers. In
order to compensate high cost of living, worker demand for high wage rates. Demand
for high wage rate are accepted during the period of rising prices. Increase in wages
will raise the cost of production. Therefore increase in wages will push the price
upward. Combined effect of wages and prices creates hyper inflation.

OPEN INFLATION:
It is a situation when the inflation gets out of control and cannot be controlled by
government price control policy is called open inflation.

SUPPRESSED INFLATION:
It is the situation when the inflation can be controlled by the government price control
policy.

PROFIT INDUCED INFLATION:

When businessmen tend to increase their profit and increase the price of their
commodities then their will be profit induced inflation. It is usually occurs in such
economy which are dominated by monopolies. Monopolist is in the position to
increase the price of his product at his will.

BUDGETRY INFLATION OR DEFIICIT INFLATION:

When the revenue of the government are less than its expenditures, it is said to run
budgetary deficit. To overcome this deficit govt. makes borrowing from internal and
external source to increase the supply of money. Higher supply induced more
consumption causing price level to high.
MONETARY INFLATION:
When there is an expansion in the currency notes in circulation then there will be
monetary inflation.

INCOME INFLATION:
The inflation which occurs from high income level is called income inflation. In
consumption oriented society where propensity to consume is higher than propensity to
save such higher income will induce people will induce people to spend lavishly on
consumer goods.

PRODUCTION INFLATION:
This inflation arises due to lack of capital projects. If the process of industry is slow as
compared to rare of growth of population, then soon the economy would be unable to
meet all the need s of its members. Shortage of goods creates higher demand which
forces the price to up.

DEVALUATION INFLATION:
Devaluation makes our currency cheap in terms of foreign currency. It also makes all
those goods cheap whose price are in rupees. Further the exports of the country
increases. Such increase in exports increases the profit and income of local exporters.
It leads to inflation.

IMPORTED INFLATION:
It means the inflation that arises due to increase in the price of demand goods.
Suppliers in foreign countries may increase the prices of their products. This will affect
the domestic consumers and producers. They will be compelled to increase the price of
goods. It will create inflation.

CEILING INFLATION:
Inflation that occurs due to various ceiling prices of government. Ceiling prices are set
by the government to maintain prices of essential goods. Price is seized below the
equilibrium to maintain prices of essential goods. Prices are seized below the
equilibrium price level of free market. However, the price ceiling sometimes invites
black marketing. It may cause inflation.

CAUSES OF INFLATION:
There are two main causes of inflation in less developing countries like Pakistan.
A) Demand pull inflation
B) Cost push inflation

(A).Demand Pull Inflation

Demand pull inflation is also called aggregate demand inflation it means when the
demand of commodities increases compare to the supply of goods.
Following are the causes of demand pull inflation.
1- High monetary expansion:
High monetary expansion is the basic reason of demand pull inflation. This situation
arises when there is grater increase in the money supply raises the demand for goods
and services and so prices start moving upward.

2- Increase in wages
Increase in wages is the second cause for demand pull inflation. It means when
there is increase in wages, pension and salaries. It increases the purchasing power of
people; it ultimately increases the prices of commodities which results in inflation.

3- Increase in population
Population in developing countries is also increasing day by day. Due to increase in
population due to increase

4- Hoarding
Hoarding means keeping the commodities in stock . Businessmen keep their
necessities of life in stock for earning abnormal profit .So due to stock of commodities,
demand increases that gives rise to price which results inflation.

5-Deficit Financing
If there is big deficit in the budget and Government is covering it by printing of new
notes, it will create inflationary pressure in the economy.

6- Foreign Incomes
Foreign incomes are also a cause of inflation. Such as Pakistani people are working in
abroad and they send money to their families in Pakistan. So their families have more
purchasing power as compare to other people, which creates inflation.

7- Wars
Wars are also caused of inflation. Because in war period mostly resources are utilized
for the purchase of production of weapons. Consumable goods are less produced.
Goods falls short which gives rise to prices.

8- Natural Calamities
Natural calamities are also becomes the cause of demand pull inflation. Due to floods
heavy rains, earthquakes, production level becomes low demand for commodities
increases which gives rise to prices.

9- Habits Of The People

Some people are extravagant, because they want to achieve the higher standard of
living. S they purchase commodities without keeping in mind the price of goods. So
inflation increases.
10- Construction Expenditures
Mostly people are spending their money in the construction of houses, so they are not
of the view to invest money in the productive tasks. In this manner production falls short,
this gives rise to prices.

Change in International and Domestic Prices of 5 Major

%
commodities
Commodity % Change % Change

International Prices Apr 09- Domestic Prices Apr 09-Apr

Apr 10 10

Sugar 21 38

Wheat ‐ 16 0

Crude 70 27
oil/Petrol

Palm/Edible 19 47
Oil

Milk/Dairy 74 17

Source: World Bank;

FAO; FBS

Fluctuation of energy Prices in prices

2006-2010
Petrol (super) Electric Charges Gas Charges

Fiscal Year Rs per liter (up to 50 unit) Rs Per CF

2006-07 56.00 2.49 99.79

2007-08 57.68 2.76 97.19

2008-09 69.72 3.16 96.30

2009-10Apr. 66.49 3.58 105.10

Source: Federal Bureau of Statistics

COST PUSH INFLATION
The second major cause of inflation is cost push inflation. it describes the situation
where price of goods increases due to increase in the cost of factors of production .
Increase in cost s pushes the prices upwards. Following are the important causes of
cost push inflation

1- Increase In Wages
Increments in the wages and salaries of employs affect the production cost
commodities. This thing creates the inflationary pressure in the country.

2- Increase In Taxes
If the government levies new taxes and raises the rates of old taxes, the producers
generally shifts the burden on to consumers. So the increase in the selling prices of the
commodities pushes up the inflationary trend in the economy.

3- Increase IN The Price Of Raw Material

Some times due to shortage of raw material, the prices of raw material increases which
ultimately gives rise to prices of finished goods.

4- Profit Push Inflation

It means that some businessmen have monopoly in the market. They charge prices for earning
high margin of profit because there is no competitive product is available. So the businessmen
charge high prices which results inflationary pressure.

% Inflation Rates In Pakistan Month wise (2008-10)

Year Jan Feb Mar. Apr. May June July Aug. Sep. Oct Nov. Dec.

2010 13.68 13.04 12.91 13.26 13.07 12.69 12.34 12.79 13.77 14.17 15.48 -

2009 20.52 21.07 19.07 17.19 14.39 13.14 11.17 10.69 10.12 8.87 10.511 10.52

2008 11.86 11.25 14.12 17.21 19.27 21.53 24.33 25.33 23.91 25.00 24.68 23.34
 Inflation Trends in Pakistan 2008 -2010

30 2010
2009
2008
25

20

15

10

0
Jan Feb Mar. Apr. May June July Aug. Sep Oct. Nov. Dec.

Source: Federal Bureau of

Statistics

Measure To Control Inflation

The main measures which are used to control the inflation are

(A) Monetary Measures

(B) Fiscal Measures

(C) Other Measures

A- Monetary measure
 Monetary measures are those techniques which are adopted by central bank to control the
supply of money in the economy. The main monetary measures are as under:

1- Bank Rate Policy:

The bank rate (or the discount rate)is the interest rate at which the central bank lends
money to commercial banks. When central bank wants to control inflation, it raises the
bank rate due to which the borrowings from commercials banks decrease and inflation
may controlled.

2- Open Market Operation:

When central bank sales or purchase the securities in open market, it is called open
market operation. If there is inflation in the country then central bank sells the securities
so that inflation may be controlled

3- Variable Reserve Ratio:

In order to control the inflation, the central bank increases the reserve ratio.

4- Credit Rationing:
When there is inflationary pressure, the central bank adopts the policy of credit
rationing. It means central bank advices the commercial bank to stop the issuing of
loans for some time, resultantly inflationary pressure is decreased.

5- Monetary reforms
The government can order to exchange the old notes by ones and in this way a large
part of money may b blocked. Money should be repaid to people after achieving the
purpose.
B- Fiscal Measures
Fiscal measure is based upon demand management i.e., raising or lowering the level of
aggregate the demand by controlling the various expenditures. The fiscal measures are:

1-Changes In Tax Rates

In order to control inflation government decreases the tax rates by encouraging the
industrialists, resultantly they make more production, which control the price level.

2- Changes In Government Expenditures

If government decreases their expenditures on unproductive activities then inflation is
automatically controlled.

3- Public Borrowing
Public borrowing is another effective method of controlling inflation. Public borrowing
decreases the demand of public for different commodities and hence price level.

4- Control Of Deficit Financing

In order to control the inflationary pressure in the economy, government should avoid
from deficit financing.

Other Measures :

1- Increase in The Supply of Goods:

Steps should be taken to increase the supply of goods in the market. If there are
sufficient products in the market then too much money will not chase the too few goods
and in this way inflation will be controlled.

2- Population Planning:
Control on population by adopting different measures of family planning will reduced the
demand and finally prices will be controlled.

3- Price the Control Policy:

The government should adopt strict price control policy against the profiteers and
hoarders.

4- Economic planning:
Effective economic planning is necessary to control the inflation by making policies for
the interest of the wh0hole nation and by sacrificing their personal benefits.

5- Political Stability:
If there is political stability in the country and there is no tug of war between the
politicians then production will increase and finally decrease in prices.

6- Control on Smuggling:
The government adopts strict measures on check posts to decrease smuggling to
control the inflation.

Conclusion
The essence of discussion is that government should control non-development
expenditures, make taxation reforms and introduced Islamic economic system in the
country.