Inflation in Pakistan

What is inflation?

The rise of price and goods and services in an economy over a period of time. When general price level rise each unit of functional currency buys fewer good and services. The value of money decline.

Inflation rate of last 5 years (2009-15)

Causes of inflation in Pakistan

Increase in demand

·         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.

   

·         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.

·         More Investment

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.

·         Non-productive Expenditures

Government of Pakistan has to make a lot of non-productive expenditures like defence etc. Such unproductive expenditures lead to the wastage of economy’s precious resources and also lead to inflation.

·         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.

Decrease in supply

·         Slow Agricultural Development

Low growth rate of agricultural sector caused in shortage of productivity. It results in low supply and increase in price level.

·         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.

·         Increase in Wages & Salaries

Now labor 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.

Effects of inflation

·               It is a huge problem for employees, taking fixed salaries.

·               It generates unfair distribution of income and wealth.

·               Inflation reduces the saving of the population.

·               It is a cause of unfavorable balance of trade and payment.

·               Inflation increases the rate of interest.

·               It creates a lot of social evils.

·               It is difficult for consumers to purchases more goods.

·               It generates very bad effects on the poor labor force.

·               Inflation reduces the living standard and purchasing power of people.

·               It is harmful for creditors.

·               Inflation reduces the purchasing power

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.