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Inflation is defined as a sustained increase in the general level of prices

for goods and services. Inflation is the change in the level of prices. Most
of the time, people mean the "Consumer Price Index" or "CPI" when they
discuss inflation in a country. This is the change in the price "shopping
basket" of consumer goods for a country that the national statistics
agency has sampled over time on a monthly basis. The "core CPI" is the
change in prices without the food and energy components, or "ex food
and energy". Since food and energy prices are volatile, the "core CPI" is
thought to be a more accurate measure of underlying inflation.

It is measured as an annual percentage increase. The GDP deflator is

another very important measure of inflation as it measures the price
changes in goods that are produced domestically. In effect, inflation
decreases the value of your money and makes it more expensive to buy
goods and services. As inflation rises, every rupee you own buys a smaller
percentage of a good or service.
Pakistan won final approval for an emergency $7.6 billion International
Monetary Fund (IMF) loan to steady the finances of this strategically vital
country amid a global credit crunch."The Pakistani economy was buffeted
by large shocks... including adverse security developments, higher oil and
food import prices, and the global financial turmoil," .Pakistan will
immediately access $3.1 billion under the 23-month facility, with the rest
phased in subject to quarterly review, the fund said.

The board's approval sanctions a decision earlier this month by the IMF to
help Pakistan stave off a balance of payments crisis and work toward a
broader economic revival.
Pakistan's currency, the rupee, has slumped against the dollar and the
country's stock market has fallen sharply after foreign investors took flight
amid a global credit crisis in which capital has flooded from emerging
markets to safe havens, like the United States.
"The central bank will pursue a flexible exchange rate policy, with
intervention in the foreign exchange market geared toward achieving the
program's reserve targets and smoothing excessive exchange rate
volatility," the IMF said.
Specifically, the fiscal deficit will be trimmed to 4.2 percent of GDP in
2008/2009 and 3.3 percent in 2009/2010, compared with 7.4 percent in
the fiscal year to June 2008.
Pakistan and the World Bank will create "a comprehensive and effectively
targeted social safety net" with existing social programs boosted in the
meantime, the IMF said.


"To this end, spending on the social safety net will be increased by 0.6
percentage point of GDP, to 0.9 percent of GDP in 2008/2009," the Fund
In addition, the IMF plan envisages tighter monetary policy to control
inflation. The State Bank of Pakistan recently raised interest rates 200
basis points to 15 percent and "stands ready to further tighten monetary
conditions as needed.


The World Bank has approved a $500-million interest-free loan to help
stabilize Pakistan's economy. The World Bank has asked Pakistan to keep
vigil on monetary and fiscal policies, curb inflation, and improve current
trade deficit for sustainable higher growth rate.
'Pakistan has experienced severe external and internal shocks in the past
year and is confronting a very difficult macro-economic situation,' the
Washington-based World Bank said in a statement.
'The rise in international oil and food prices sharply inflated the country's
import bill and the subsequent slowdown in the global economy
dampened external demand for Pakistan's exports.'
It noted that 'political turmoil and uncertainties affected investor
confidence', leading to capital outflows.
It also seeks to improve Pakistan's competitiveness by bolstering the
financial sector and cutting barriers to business.
'The government of Pakistan has taken important policy steps to stabilise
the economy,' World Bank director for Pakistan, Yusupha Crookes, said.
'These polices have succeeded in reducing external imbalances,
rebuilding foreign exchange reserves, narrowing fiscal overruns, and
lowering inflation.
'However, the sharp deterioration of the global economy poses significant
risks to exports, remittances, and external financing. This underlines the
importance of Pakistan regaining economic stability and protecting its
poorest citizens in the process.


Inflation is measured with a price index.

The two main groups of price indexes that measure inflation are:

1. The Consumer Price Index:


A family of indexes that measures the average change in selling

prices received by domestic producers of goods and services over
time. PPIs measure price change from the perspective of the seller.

2. The Producer Price Indexes:

A measure that examines the weighted average of prices of a

basket of consumer goods and services, such as transportation, food
and medical care. The CPI is calculated by taking price changes for
each item in the predetermined basket of goods and averaging
them; the goods are weighted according to their
importance. Changes in CPI are used to assess price changes
associated with the cost of living.



Year CPI GDP DEF % (Increase over

(% increase over proceeding
proceeding period)

1981-82 111.10 11.1 109.37 9.4

1982-83 116.29 4.7 115.14 5.3

1983-84 124.76 7.3 126.26 9.7

1984-85 131.83 5.7 131.99 4.5

1985-86 137.57 4.4 136.33 3.3

1986-87 142.52 3.6 142.49 4.5

1987-88 151.49 6.3 156.19 9.6

1988-89 167.23 10.4 169.60 8.6

1989-90 177.33 6.0 180.54 6.5

1990-91 199.78 12.7 204.13 13.1

1991-92 218.99 9.6 224.69 10.1

1992-93 239.26 9.3 224.17 8.7


1993-94 266.00 11.2 276.11 13.1

1994-95(july-april) 298.20 12.1 317.00 14.8


Govt of Pak economic survey 199-95, Islamabad

Ministry of finance, Statistical Annexure.

Pasha Hafiz (1995), what explain the current high rate of inflation in
Pakistan. The News, April 28, P.20.

A comparison of Pakistan’s inflation rate with the rest of the world. Shows
that although prices in Pakistan are on average staler when compared
with the average rate of inflation for developing countries but they turn
out to be far from satisfactory when compared with the average of
developed countries.


(Annual average rate of the inflation)

Country / Group 1970-80 1980-


Low income economics 7.3 14.1

Low income economics

(Excluding India & China) 13.4 27.1

High income economies 9.5 4.3

Pakistan 13.4 7.4

Source: World Bank (1995) P.No. 162-63



(During The Last One Year)

Country Rate of Inflation

Australia 5.1

Canada 1.6

Sweden 2.0

United state 2.7

Malaysia 3.2

Switzerland 0.8

Singapore 0.9

Argentina 0.7

Taiwan 3.7

Denmark 1.7

Source: the economist March 9, 1996.

Inflation rate in Pakistan is on rise especially since 1990. Pakistan

had reactively stable. Prices during the 1960, when the annual
average increase in CPI was just 3.3% during in 1970 the prices
increase rapidly and CPI rose on average, by 11.9% but there were
many reasons for it and many of govt. Pasha (1995: 20) lists their
important reasons for double digit inflation of 1970. Two major oil
shocks, a massive devastating of currency, and devastating floods
destroy agricultural crops. but again in 1980 Pakistan returned to its
condition of price stability, but with the start of 1990s a phenomenal
upsurge in price have been observed and all the indications are
shown double digit rates of inflation. The situation is disturbing
because if official figures are going double digits then actual rate of
inflation would certainly higher.


During 2001-04, inflation was very low. Interestingly, support price

of wheat was not raised during 2001-03. CPI shot up again in 2004-
05 when inflation reached 9.3 per cent. It dropped slightly to eight
per cent in 2005-06. Inflation expectations alone explain 45.73 per
cent of the inflation in 2005-06 and 31.1 per cent in 2004-05. This
critical role of inflation expectations can be explained by emergence
of the phenomena like hoarding, assets price hikes, and surge in
house rents.

In 2004-05, two other important factors for inflation were

government sector borrowing and support/procurement price of
wheat, contributing 17.6 per cent and 11.8 per cent respectively.
The government taxes did not cause any significant rise in prices in
2004-05 and 2005-05. This seems logical since there has been no
change in the tax to GDP ratio over the last few years.

There was no further strong pressure on import costs because of a

stable exchange rate. This policy cannot be sustained for long.
Trade deficits are setting the direction.

The expansionary monetary policy did contribute in promising GDP

growth but it also led to the rise in consumer prices.

The inflation rate as measured by the changes in Consumer Price

Index (CPI) after reaching peak at 25.3 percent in August 2008,
showing easing since November 2008 but bounced back to 21.1
percent in February 2009 mainly because of spike in the prices of
some food items like onion, chicken farm, sugar etc. WPI inflation is
following international declining trend but non-food component of
the CPI showed some stubbornness till February 2009. The CPI
inflation averaged 23.5 percent in July-February 2008-09 as against
8.9 percent in the comparable period of last year.

The Wholesale Price Index (WPI) during first eight months of 2008-
09 has increased by 24.7 percent, as against 11.7 percent in the
comparable period of last year. It has declined from as high as 35.7
percent in August 2008 to 15.0 percent in February 2009, reflecting
a marked downward correction in the last six months. This downturn
is contributed by both food and non-food components. The non-food
component fell more steeply from 37.4 percent in August 2008 to
9.8 percent in February 2009. Food component has decelerated
from 33.5 percent in August 2008 to 22.0 percent in February 2009.


Inflation Situation in
Pakistan (%)



July 24.3 34.0 33.0 14.7

August 25.3 35.7 33.9 16.4

September 23.9 33.2 31.1 17.3

October 25.0 28.4 32.7 18.3

November 24.7 19.9 29.8 18.9

December 23.3 17.6 25.8 18.8

January 20.5 15.7 20.8 18.91

February 21.1 15.0 23.4 18.85

The Sensitive Price Indicator (SPI) has recorded an increase of 26.1

percent during this period (Jul-February 2008-09) as against 9.9
percent in the same period of last year. Going forward, the prices of
edibles like sugar, wheat, meets, onions will be crucial in
determining the fate of the SPI. Going forward, the prices of edibles
like sugar, wheat, ghee/ cooking oil will be crucial in determining the
fate of the SPI.

Inflation in Pakistan has shown rigidity to monetary policy measures

because on one side there is a contractionary monetary policy and
on the other an expansionary fiscal policy.


Inflation rate (consumer prices):

• This entry furnishes the annual percent change in consumer prices

compared with the previous year's consumer prices.

Year Inflation rate (consumer prices) (%)

2000 6

2001 5.2

2002 4

2003 3.9

2004 2.9

2005 4.8

2006 9.1

2007 7.9

2008 6.9

• This entry furnishes the annual percent change in consumer prices

compared with the previous year's consumer prices.

Yea Inflation rate (consumer Ran Percent Date of

r prices) k Change Information

200 3.90 % 90 2002 est.


200 2.90 % 123 -25.64 % 2003 est.


200 4.80 % 143 65.52 % FY03/04 est.


200 9.10 % 186 89.58 % 2005 est.


200 7.90 % 168 -13.19 % 2006 est.


200 7.60 % 162 -3.80 % 2007 est.



Inflation affects the distribution of both income and wealth. Nominal

incomes of some individuals tend to increase with inflation, while those of
others remain constant thus causing a change in the distribution of
income in favour of the former group.
Importance of monetary factors and structuralizes supply-side factors for
inflation in Pakistan. A stylized inflation model is specified that includes
standard monetary variables (money supply, credit to the private sector),
the exchange rate, as well as the wheat support price as a supply-side
factor that has received considerable attention in Pakistan. The model is
estimated for the period January 1998 to June 2005 on a monthly basis.
The results indicate that monetary factors have played a dominant role in
recent inflation, affecting inflation with a lag of about one year. For
Pakistan’s economy, inflation can be bad if it crosses the threshold of six
per cent, and can be extremely harmful if it crosses the double digit level.
Several supply and demand factors could be responsible for this surge in


Demand-Pull Inflation
Demand-pull inflation refers to the idea that the economy actual
demands more goods and services than available. This shortage of
supply enables sellers to raise prices until equilibrium is put in place
between supply and demand.


High Monetary Expansion:

The supply of money is expanding quickly every year but the supply
of goods and services are not increasing according to those rates.
Due to this, prices are rising.

Increase In Money Supply:

Money supply plays a large role in inflationary pressure as well.
Monetarist economists believe that if the Federal Reserve does not
control the money supply adequately, it may actually grow at a rate
faster than that of the potential output in the economy, or real GDP.
The belief is that this will drive up prices and hence, inflation. Low
interest rates correspond with a high level of money supply and
allow for more investment in big business and new ideas which
eventually leads to unsustainable levels of inflation as cheap money
is available. It reduces the value of money, resulting in uncertainty
of the value of gains and losses of borrowers, lenders, and buyers
and sellers. The increasing uncertainty discourages saving and

Disposable Income:
The amount of money that households have available for spending
and saving after income taxes have been accounted for. Disposable
personal income is often monitored as one of the many key
economic indicators used to gauge the overall state of the economy.
Increase in disposable income also raises the level of inflation.

Community’s Aggregate:
Increase in community’s aggregate spending more amount of
money on consumption and investment goods.

Deficit Financing:
Means printing of currency notes by the Government, in order to
cover the defect in the budged. It will create inflationary pressure.

Foreign Remittances:
The increased remittances by the people working outside the
country, purchasing power of their families are increased day by
day. So the demand is increased.

Excessive speculation and tendency to hoarding and

profiteering on the part of producers and traders.


Increase In foreign demand and hence exports :

When the actual output catches up with the potential output, there
remains no spare capacity, and the economy is working at full
employment level, any further gain in growth comes at the cost of
rising inflation. If demand continues to grow at this stage, and the
productive capacity does not expand, there is a serious threat of
rapid inflation in the long run without any additional growth in the
output. A prolonged phase of rising inflation in such a case can have
severe consequences for the economy.
Second, the growing gap between domestic demand and production
was filled by a sharp increase in net imports.

Increase In Wages:
Inflation can artificially be created through a circular increase in
wage earners demands and then the subsequent increase in
producer costs which will drive up the prices of their goods and
services. This will then translate back into higher prices for the wage
earners or consumers. As demands go higher from each side,
inflation will continue to rise.

Increase In Prices Of Food:

The prices of flour, the staple food of the people, have more than
doubled while the price of edible oil has shot up over 100 per cent in
one year. Similarly increase in petroleum prices has tremendously
added to inflation.

Employment rate is low:

Under normal circumstances, there is an increase in employment
and salaries, but in our country where inflation is in double digit, the
employment rate is still low. It means the government policies are
not consistent to support the poor and the middle classes.

Increase In Population:
The rate of population growth in Pakistan is more than 3%. Due to
this, aggregate demand is increasing day by day.

Consumption Habits:
The people in Pakistan are extravagant. The people want to achieve
high standard of living. So there is a demonstration effect in
Pakistan. As a result, the rise in prices of goods and services


Rising Labour Costs:

Rising labour costs can also lead to inflation. As workers demand

wage increases, companies usually chose to pass on those costs to
their customers.
Devaluation brings inflation due to rise are the prices of imports.
The people know that after devaluation prices will rise and they
begin to hold stocks. Price level goes up due to increase in the
general demand.


Cost-Push Theory:

The cost-push theory , also known as "supply shock inflation",

suggests that shortages or shocks to the available supply of a
certain good or product will cause a ripple effect through the
economy by raising prices through the supply chain from the
producer to the consumer. You can readily see this in oil markets.
When OPEC reduces oil supply, prices are artificially driven up and
result in higher prices at the pump.
Deficiency of capital equipment.

Scarcity of other complementary factors of production:

Rising import prices are also considered an important factor for
inflation. Exchange rate, if depreciating can also put upward
pressure on price level. Increase in prices of goods, such as petrol,
raw material etc makes our imports costlier, impacting on cost of

Increase In Exports:
Increase in exports to earn foreign exchange which reduce the
domestic supply of goods.

Decrease In Imports:
Decrease in imports of a country because of trade restrictions by

Hoarding In Anticipation Of Price Rise:

Businessmen hoard necessities of life for earning profits. So
increase in hording, profiteering, increases the prices of the



Natural Calamities:
Due to floods, excessive rains and earthquakes the level of
production is decreased increase in demand and hence, the prices
of goods is increase.

Pro long industrial unrest.

Rise In Production Costs:

Another common cause of inflation is a rise in production costs,
which leads to an increase in the price of the final product. For
example, if raw materials increase in price, this leads to the cost of
production increasing, this in turn leads to the company increasing
prices to maintain steady profits.

Indirect Taxes:
Indirect taxes are also blamed as the main cause of inflation. The
indirect taxes, such as sales tax and excise duties raise the prices of
consumer goods. This creates inflationary pressure. On the other
hand, direct taxes reduce the take-home income and have anti-
inflationary effect. A substantial increase in support price of wheat is
estimated to have an inflationary effect on consumer prices,
particularly food prices. This effect is due to the fact that wheat and
wheat-related products account for 5.1 per cent of the CPI basket.


Inflation affects both the economy of a country and its social conditions,
as well as the political and moral lives of its inhabitants. However, the
economic effects of Inflation are stated and described below:

Time Value Of Money:

Price inflation has immense effect on the Time Value of Money

(TVM). This acts as a principal component of the rates of interest,
which forms the basis of all TVM calculations. The real or estimated
changes occurring in the rates of inflation lead to changes in the
rates of interest as well.

Treasury Of A Nation:

Inflation exerts impact on the treasury of a nation as well.

Decrease In The Purchasing Power:

The most immediate effect of inflation is the decrease in the

purchasing power of rupee and its depreciation. When inflation goes
up, there is a decline in the purchasing power of money. Inflation
influences the investments of a country.

Change In Income:

Inflation changes the allocation of income. This exerts maximum

effect on the lenders than the borrowers at the time of persisting
inflation, because the loans sanctioned previously are paid back
later in the form of inflated rupee.

High Price Levels:

Inflation leads to a handful of the consumers in making extensive
speculation, to derive advantage of the high price levels. Since
some of the purchases are high-risk investments, they result in
diversion of the expenditures from regular channels, giving birth to
Inflation Affect The Currency Trading:

When inflation rate is down, banks would cut down interest rates to
encourage economic activities. On the other hand, during high
inflation, banks would increase the interest rates to discourage lending
and spending. Hiking up the interest rates boosts the value of the
currency. This is true in US where rising of interest rates by the Federal
bank would encourage investors to capitalize on higher returns. What is
the better way to measure inflation in a certain country rather than to


refer its consumer price index? Each country may have different ways
of measuring and inflation indication.

Balance Of Payments And Currency Exchange Rates:

When we do not make ends meet we become less credit-worthy, our

currency weakens, and so does its purchasing power. It buys less
and prices increase. As our currency weakens (devalues) so our
exports become cheaper abroad but we have to pay more for
imports. This reduces our standard of living relative to others
abroad as they find our produce cheaper while we find theirs more
expensive. We now have to produce and sell a greater volume of
exports so as to earn as much foreign currency as we did before and
have to sell even more if we are to improve our position, if we are to
benefit from a devaluating currency.

Gap between group:

• Business class enjoy the inflation. They get benefit from the
high rates of goods and services.
• Fixed income group really suffer from high rates.

This makes the gap between rich and poor. Wealth of high income
people increases and middle income group suffer most and low
income group pissed off.




We can summarize the policy option available to Pak govt in the
following words:

 Reduction in budget surplus.

 Reduce the monthly expansion.

 Improve tax collection and/ or encouragement to private


 Control on the population.

 Improvement in balance of payment.

 Increase in growth rate of read output.

 Check on prices of essential items. Govt should also make

sure that these items are available in adequate quantity.

 Political stability which restore the businessmen’s

continence and ensure a smooth supply of goods and

 To reduce our Government Luxury Expenses both Federal

and Provincial.

 To recess the complete system of Direct and Indirect


 To increase the Production of Food, Industry and Service


 Take benefit to public in shape of (Oil & Petrol is low than

reduce the prices).

 Should charged Capital Gain tax to Burger and Theft

Families and persons?

 Reduce Unemployment.


 Increase in Agriculture, industry.

 Monopoly Control System should be work accurately.

 SBP should take major steps to control inflation.

Reducing Budgetary Deficit:

The budgetary deficit should be kept low level. The deficit should
be met by disciplined policy of demand management. Emphasis
on commodity producing sectors: The government should give
special attention to the production of cottons, wheat, vegetables,
edible oil etc. it will have soothing effects on inflating.

Commodity balance:
The government should have a strict watch on the prices of
essential commodities in the country. It should take immediate
steps in changing the import and export duties and maintain the
availability of goods is reasonable prices. Curtailment of
administrative expenses: The curtailment of administrative
expenses can have a softening effect on inflation. Closing of the
utility stores; the net work of over 700 utility stores has not
helped in stabilizing the prices in the country. These are mostly
located in big cities and posh localities. The low income groups
are least benefiting from them. The earlier they are closed, the
better it is.

Inflation is a hydra header monster. It cannot be controlled by taking a

single measure. However, if monetary and fiscal measures are wisely
coordinated, it can greatly help in controlling the continuous process of
rising prices. The main anti inflationary measures both short and long
terms are: Containing money supply. The monetary supply should be
kept within reasonable limits.




There are many policies which are adopted to control inflation.

Monetary Policy
Fiscal Policy
Income Policy


First Step:

First type of anti inflationary policy is our analysis in monetary policy. And
of course a contractionary monetary policy is required to control the
problem of inflation. Anti Inflationary monetary policy can take many
forms. 1st is increase in bank rate. An increase in bank rate increases
other interest rates and thus cost of borrowing rises and at the same time
incentive to save increases. Both these results lead to contraption of
credit and control of consumption. Thus inflation curtailed.

Second Step:


Second Monetary step to control inflation is increase in reserve

requirements on various types of deposit of the commercial banks. When
banks are required to keep more reserves bank there ability to extend
credit is reduce which help the govt check the inflationary tendencies.

Third Step:

Third famous measure is the context of monetary policy is open market

operation. In anti inflationary movement the govt or central bank will sell
more securities to the public and finance institution. These will decrease
the volume of currency into circulation and checks govt choice regarding
fever of spending and taxation.

The Increasing Prices:

Open market operation may be a successful policy to curtain private

sector demand.


Fiscal policy can be applied in many ways to control inflation.

First Is Through Control Of Govt Expenditure:

In times of inflation if a govt reduces its expenditure. It will have a

depressing effect on aggregate demand and these prices will be

Second Fact Of Fiscal Policy Is Taxes:

An increase in taxes will serves the purpose of controlling inflation. But

caution in exercise of this power is that new taxes should not be
detriments the growth of output in the economy. Because it is increase in
output that increases the inflation.

Third Fiscal Step to Control Inflation:

Inflation is to provide incentives to increase the savings. As a mother of

fact, this is the most important and leash harmful anti inflationary policy.

Fourth Aspect Of Anti Inflationary Fiscal Policy Is Debt:

Management short trade off between inflation and loments.

We can live with inflation but cannot live with unemployment. Because of
Phillips law as open law.


It means that govt is able to manage its debts, especially domestic debt,
in the economy.

Last but not the least fiscal measure which we are considering here is
over valuation of the exchange rate. It means that a govt maintains a
higher value of its currency in the international market than the value
which would be determined by the free play of forces of demand and


Fender (1990-97) defines income policy in the following words.

An attempt to influence directly by persuasion legislation or some other

means the rate of increase of wages. Whether it is money or real wages
that is the objects of the policy has been deliberately left unspecified
traditionally income policies have been envisaged as influencing money
wages, more recently, however, a number of proposals have emerged
which have designed primary to influence read wages.

Income policies can be applied in many ways.

Wage Price Control:

Wage price control it refers to direct control on prices and wages. This
policy may work in the short run, but in the long-run it becomes
ineffective because people evade control when they persist. Another
vainer may be voluntary wage-price guidelines but these too are seldom

Income policies are not always desirable. There are many important
things that need to be considered before we can apply income policies.
These things include,

 The impact of such policies in the feasible intertemporal

combination if inflation and unemployment.
 The optimal demand management policy (and the complementary
policies) both with and without the income policy.
 Social cost or benefits associated with each time path of inflation
and unemployment.
 The social cost due to any effects on the allocation of resources the
policy might have.


In order to control inflation in the country, the government should take
corrective measures. If the present situation prevails for long only two
classes would exist in the country -- the rich and the poor. The middle
class would vanish.

We have to address this rising inflation. It’s because we all grudgingly

pay the inflated prices that these continue to rise unchecked. This only
increases the trial of our daily grind. Inflation is a worldwide problem but
when we see so many citizens by the roadsides and also, we see that
making ends meet for the majority of the urban population is becoming


harder and harder then the subsequent problems of even more crime and
intolerance are close to follow.