Inflation is the state when thevalue of money is falling andthere is an upward rise inprice level. Too much of money chasing, butvery few goods. For example, if the inflation rateis 5% for a particular item, itmeans that the demand is 5% morethan the total supply of thatparticular item.
Types of inflationDemand pull Inflation .Cost push inflation.Pricing power inflation.Skew inflation .
Demand pull inflationWhen demand grows fasterthan supply it pushesgeneral prices up. This canbe described as “too muchmoney chasing too fewgoods”.
Cost push inflationCost-push inflation is a typeof inflation caused bysubstantial increases in thecost of Important goods orservices where no suitablealternative is available.
Pricing power inflationThis type of inflation iscaused by business houses whotend to increase prices toincrease their profit margins. Itis more common in oligopolisticeconomies.skew inflationThis term has been coinedobserving the unusual inflationwhere in there was hugeinflation in the food sectorwith the non-food sectorremaining more or less
Factors affecting inflation Increase in money supply. Increase in exports. Black money.(fake currency). Increase in public expenditure Decrease in the aggregate supply ofgoods and services.
A measure of price changes in consumer goods andservices such as gasoline,food,clothing and automobiles.the CPI measures price change from the perspective of aconsumer.A family of indexes that measure the average change overtime in selling prices by domestic producers of goods andservices. PPI measures price change from the perspectiveof a seller
Problems due to inflationWhen the balance between supply and demandGoes out of control, consumers could change theirbuying habits, forcing manufacturers to cut downproduction.Price increase can worsen the poverty affectingthe low income householdProducers will not be able to control the cost of rawmaterial and labor and hence the price of the finalproduct, which results in less profit or in some casesno profit, forcing them out of businessManufactures will not have an incentive to invest innew equipment and technology
CONCLUSION Monetary policy has to be forward-looking to achieve its inflation target.Current monetary conditions impactinflation with a lag of around 12 monthsin Pakistan. Therefore, the SBP shouldset monetary policy today with a view tomeeting its inflation target around oneyear from now.