INFLATION

Group members:Aiman Naveed (032)Ifrah Ferheen (019)Sundas Nosheen (037)Iqra Akhter (028)

Inflation• Inflation is a sustained increase in

the general price level of goods and services in an economy over a period of time.

• Inflation reflects a reduction in the purchasing power per unit of money .

• Inflation is one of the obstacles on the way of development

HISTROY OF INFLATION• In course of history, many

different forms of money have been used.

• When gold was used as currency government mix them with other metals and reissue them at the same value. In this way price of each coin is lowered.

• Then currency notes were introduced and government can print notes equivalent to amount of gold they have.

Methods of measuring inflation• Consumer Price Index

(CPI) The CPI is constructed on the basis of retail prices of 375 goods in 35 big cities. This price index analyses the cost of living of urban consumers• Wholesale Price Index

(WPI)• Sensitive Price Index

(SPI)

Highest rate of INFLATION in Pakistan

• The rate of inflation was highest in 2008 due to the steep rise in food inflation

• Non-food inflation also showed increase of 19 % as compared to 6.8% of last year.

• In the international markets, oil prices and food prices dropped.

• In Pakistan due to depreciation of rupee, domestic inflation rate was increased

CURRENT SITUATION OF INFLATION• After 15 months, rate of inflation increased to

10.9% in November, 13.• Prices of petroleum and electricity tariffs have

increased, new taxes have been introduced and increased the overall inflation.

• Rupee depreciation also led to increase in prices of imported consumer and non-consumer items.

• The government has projected an inflation target of 8pc for 2013-14.This target has already been surpassed in the first five months of year. Non-food inflation witnessed an increase of 9.4pc.

Causes of Inflation• Demand-Pull Inflation

“Too much money chasing too few goods". words, if demand is growing faster than supply, prices will increase.

• Cost-Push InflationWhen companies costs go up, they need to increase prices to maintain their profit margins

• Oil Prices and Inflation oil is a major input in the economy, as oil prices move up or down, inflation follows in the same direction.

• Value of US DollarThe value of a dollar is observed in terms of purchasing power. When inflation goes up, there is a decline in the purchasing power of money.

• International Loans As nations borrow money, they

have to deal with interests, which in the end cause prices to rise as a way of keeping up with their debts.

• Federal taxesAs the taxes rise, suppliers often pass on the burden to the consumer

CAUSES OF INFLATION IN PAKISTAN

• International Inflation• Increase in Wages • Fall in Production • Population Pressure

• No Limits to Growth• Inflation caused by

budget• An increase in import

duties• Expenditure on Defense

Effects of inflation• Decrease in purchasing power of rupee• Depreciation is especially hard on retired

people with fixed incomes, as spending power decreases each month.

• Alters the distribution of income: Lenders are generally hurt more than borrowers during long inflationary periods, which mean that loans made earlier are repaid later in inflated rupees.

• Weakens the Value of money: Inflation weakens the function of money as storage of value, because each unit of money is worth less with the passing of time.

• Fixed income block :It is a huge problem for employees, taking fixed salaries. People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.

• Unfair distribution : It generates unfair distribution of income and wealth among the people

• Reduces the saving: Inflation reduces the saving of the population as expenditures increases so very difficult to save money

• Rate of interest: Inflation increases the rate of interest.

• Social evils: Inflation results in promotion of social evils like bribery, black-marketing, smuggling, suicidal actions and kidnapping

• Poor labor force: It generates very bad effects on the poor labor force, as there is inflation so people can’t invest because they didn’t take the chance of loss so labor class didn’t much work to do.

• Reprising costs: The entire economy must absorb reprising costs ("menu costs") as price lists, labels, menus and more have to be updated.

• Effect on domestic products: If the inflation rate is greater than that of other countries, domestic products become less competitive

• Disturbance in all sectors: Because of inflation, the real output, relative prices, interest rates and the reserves from taxes all are affected.

Measures to control inflation1. Monetary Measures

2. Fiscal Measures

3. Non-Monetary Measures or General Measures.

1 MONETARY MEASURES• Open Market Operation• Monetary Reforms

• Marginal Requirement

• Credit Rationing

2. FISCAL MEASURES• Cut on Expenditure• Change in Taxation

System • Restriction on Exports • De-nationalization• Protection to Infant

Industries

3. GENERAL MEASURES• Population Planning• Effective Planning• Increase in Output• Political Stability

• Discipline• Hoarding and Smuggling• Exploration of Mineral Resources

Conclusion

• 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.

• Foreign investment should be attracted.