The most important inflation is called demand-pull or excess demand inflation. It occurs when the total demand for goods and services in an economy exceeds the available supply, so the prices for them rise in a market economy.A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials. . It occurs whenever businesses in general decide to boost their prices to increase their profit margins.It basically refers to the rise in prices occurring in different commercial sectors of a country. With the rise in prices of different raw materials, the prices of the finished products in diverse sectors increase simultaneously, leading to the initiation of Sectoral Inflation. Built-in inflation is a type of inflation that results from past events and persists in the present workers believe that prices will rise so they demand more wage. The higher wage will cause producers to raise their prices.
Be wise when holding cash, whether in your home or in your savings account, if you’reearning5% interest on the money you have in your bank, and inflation rate is 10% thenyou’re in reality losing 5% and not earning anything.2) Be careful when buying bonds, high inflation rates completely destroy the value of longtermbonds.4) Learn about bartering which is trading goods or services without the exchange of money5) Ask yourself, do I really need these things I’m spending my money on? Think how muchand how often you will need something before buying it.
Pakistan, with a population of about 18 crores people has undergone a remarkable economic growth during last few years, but the core problems of the economy are still unsolved. Inflation is one of these core problems.
. In order to provide relief to the low and fixed income groups, the government has been selling wheat flour and sugar through the outlets of the Utility Stores Corporation (USC) at much lower prices than the market. The government has also allowed the import of various items through land routes from neighboring countries. But, all these are secondary measures. Problems like ‘inflation’ and ‘poverty’ can’t be resolved by applying the secondary measures directly, these need strategic planning.Government has never invited foreign investment for the production of basic goods. Agriculture sector, on which the major industries rely for the raw material has not been given sufficient subsidies.
Rising prices mean people have to pay more for the same goods and services. If income increases at a slower rate as inflation, the standard of living declines even if one makes more. So it is the root cause in making and affecting economy and made people of the country poor.
We can see the quality of supplied goods and services deteriorating when prices are either kept artificially low or when demand is highly price elastic.
As they were not able to increase their prices (despite increase in their own costs and the prices of inputs like cotton), they gradually started decreasing the weights of their products. Hence, a rug, which used to be 25 kilograms in weight 25-30 years ago, is only five kilograms in weight today. This was achieved by weaving the rugs loose, as compared to previously tightly knitted weaving. This has resulted in a huge drop in quality
In their fight against poverty our economic managers need to know a bit more precisely, how inflation is affecting the poor people. But they use CPI to evaluate the impact of inflation on the cost of living of the poor and the rich alike. CPIs one for the urban areas and the other for the rural areas. And it needs to use different basket of items for calculating the two CPIs.Andmore importantly different weightages can be assigned to some of the items that could be common in both baskets depending upon the varying volumes and frequency of their use by the rural and the urban people. In India, there are four measures of CPI including the CPI for Industrial Workers and the CPIs for agricultural laborers, rural laborers and urban non-manual employees
The inflation rate in Pakistan was last reported at 10.8 percent in March of 2012. From 2003 until 2010, the average inflation rate in Pakistan was 10.15 percent reaching an historical high of 25.33 percent in August of 2008 and a record low of 1.41 percent in July of 2003.
Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the major part of the population. It needs to be controlled by strategic planning. Domestic production should be encouraged instead of imports; investment should be given preference in consumer goods instead of luxuries, Agriculture sector should be given subsidies, foreign investment should be attracted, and developed countries should be requested for financial and managerial assistance. 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.
Group MembersATHER ABDUL JABBAR E10-013QAZI MUHAMMAD UBAID E10-078
What is Inflation…?An increase in the amount of currency incirculation, resulting in a relatively sharp andsudden fall in its value and rise in prices.
Types of Inflation Demand Pull Inflation Cost-push inflation Pricing Power Inflation Sectorial inflation Built-in inflation
Causes of Inflation Excess money printing High Production Cost International lending and national debts Federal taxes
Effects of Inflation Negative Effects Positive Effects
Negative Effects It is difficult for consumers to purchases more goods. It generates very bad effects on the poor labour force. Inflation reduces the living standard and purchasingpower of people. Causes an increase in tax bracket
Positive Effects There is more investment in country at the time ofinflation. Inflation increases the economic activities that may causeto inventions and innovations. Profit of the producers also increases when there isnormal inflation. It can benefit the cartels.
How to survive Inflation..???? Be wise when holding cash. Be careful when buying bonds. Invest in things that youre going to use anyway and willserve you for a long time. Learn about bartering. Ask yourself, do I really need these things I’m spending mymoney on?
Inflation Impact on Economy of Pakistan Rise in price of oil and gas. Secondary measures from government. Standard of living. Erosion of quality.
Rise in prices of oil and gasIn Pakistan, the most important thing is the rise in prices ofoil, gas, excise duties and the increase in the utility tariffs.These all has an inflationary impact on the economy.
Secondary measures fromgovernment Government claims that in order to keep the prices ofessential commodities under control, it has been takingvarious measures throughout the year. Unfortunately, in Pakistan, these core problems havenever undergone such a planning process.
Standard of living Inflation always hurts ones standard of living. People have to pay more for the same goods and services.
Erosion of qualityIn a competitive environment, where demand and supplyforces predominantly influence price movements, anyattempts to keep the prices down artificially results in adilution of quality and in some cases quantity (whicheffectively means no real change in price).
Example………!Take the example of rugs produced in Gakkhar Mandi. Thetown used to produce very high quality rugs, which were notonly used throughout the country but were also exported.The producers found out that the demand for rugs was highlyprice elastic.
Inflationary factors in Pakistan Supply side shocks. Rising trade deficit. Rising import prices. Indirect taxes.
Supply side shocksSupply side shocks can cause large fluctuations in food andoil prices, effects of which on overall inflation, at times, canbe so excessive that these cannot be countered throughdemand management, including monetary policy.
Rising trade deficit The expectations effect is very important since there is adanger that the current high rate of inflation can getlocked into expectations of inflation. All this can have devastating effect for the prices.
Rising import prices Rising import prices are also considered an importantfactor for inflation. Exchange rate, if depreciating canalso put upward pressure on price level. Increase in prices of goods, such as petrol, raw materialetc. makes our imports costlier, impacting on cost ofproduction.
Indirect TaxesSimilarly, indirect taxes are also blamed as the main causeof inflation. The indirect taxes, such as sales tax and exciseduties raise the prices of consumer goods. This createsinflationary pressure. On the other hand, direct taxes reducethe take-home income and have anti-inflationary effect.
Price indices in Pakistan Different price indices are used in World over the courseof fiscal year, namely: the Consumer Price Index (CPI), theWholesale Price Index (WPI), the Sensitive Price Index(SPI). The CPI is the main measure of price changes at theretail level. It covers the retail prices of 374 items in35major cities and reflects roughly the changes in the costof living of urban areas.
Flaws in measuring Inflation inPakistan Measurment is only on the basis of CPI
Graphical Analysis of Inflationfrom 2008 to 2012 Using CPI
ConclusionInflation effects the different sectors of the economy(Effects on the distribution of income and wealth, Effects onproduction, Effects on the Government, Effects on theBalance of Payment, Effects on Monetary Policy, Effects onSocial Sector, Effects on Political environment) and differentclasses of the people (Debtors & Creditors, SalariedClass, Wages earners, Fixed income group, Investors andshareholders, Businessmen, Agriculturists).
Recommendations Controlled by strategic planning. Domestic production should be encouraged. Development in agricultural sector. Strong monitoring system on different levels.