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Central Superior Services (CSS)

Examination, Pakistan
Information and ready made notes regarding preparation of compitatve examinations including Central Superior
Services, CSS, Provincial Management Services, PMS and PCS

Saturday, April 7, 2012

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Causes of Inflation

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1.INTRODUCTION:
The word INFLATION comes from inflate, which means to rise artificially.
Inflation is a rise in the general price level in a country, defined by
Brooman.AccordingtoShapiro,Inflationisapersistentriseinthegeneral
pricelevelvisvisriseriseinthepricesofgoodsandservices.Inflation
in economics implies an increase in the supply or money, unaccompanied
by a corresponding increase in the supply for output. When output fails to
increase in response to an increase in the quantity or supply of money in
circulation, inflation takes place. Therefore, it affects the overall economy
ofacountryononehandandincreasestheexpenditureofacommonman
on the other. There is no blinking the fact that the living conditions of a
common man deteriorate with the increasing prices of the goods and
services.
Inflationseemedtobeachronicprobleminmanypartsoftheworld.There
is a wide spread recognition that inflation results in inefficient resource
allocation and hence reduces potential economic growth. Inflation imposes
highcostoneconomiesandsocietiesdisproportionatelyhurtsthepoorand
fixed income groups and creates uncertainty throughout the economy and
undermines macro economic stability. High inflation has always penalized
the poor more than the rich because the poor are less able to protect
themselves against the consequences, and less able to hedge against the
risks that high inflation poses. Lowering inflation therefore, directly
benefits the low and fixed income groups. Pakistan has witnessed a low
inflation environment for the last several years but experienced a sharp
pickeduplastyearat9.3percent.
2.TYPESOFINFLATION:
I. Demand Pull Inflation: When aggregate demand of goods and services
exceeds the available supply of output there is rise in the general price
level,whichiscalleddemandpullinflation.
II. Cost Push Inflation: When there is no increase in aggregate demand,
prices may rise. This may happen because of costs, particularly the wage
costgoonrise.
III. Creeping Inflation: If the general price level in a country is rising less
than3percentperannum.
IV.TrottingInflation:Ifthegeneralpricelevelarisesbetween3to6per
centperannum.
V.RunningInflation:Theannualriseininflationofabout10percent.
VI.GalloporHyperInflation:Whentheaveragegeneralpricelevel
increasesbetween20to30percentperannum.
3.CAUSESOFINFLATION:

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CentralSuperiorServices(CSS)Examination,Pakistan:CausesofInflation
AccordingtoGallopEconomicSurvey,whichwasconductedindifferent
countriesoftheworld,therearefollowingcausesofinflation:
I.Increaseinmoneysupply
II.Increaseincommunitysaggregatespending.
III.Ariseinwages.
4.EFFECTSOFINFLATIONONDIFFERENTECONOMICGROUPS:
I. On Businessmen: It is of positive sense. When the prices of goods and
servicesincrease,theygetmoreprofit.Theyusuallytrytheirlevelbestto
increase the gap between the cost and prices. When the price increases,
thesalariesorremunerationsdontincrease.
II.OnFixedSalaryGroup:Inflationhasnegativeeffectonthefixedsalary
groupsofthecountryinvestorsmakeprofitsinthiscontext.
III.OnAgriculturists:Theagriculturistswelcomethehighpricesofthe
commodities.Thereasonissimpletheygetmoreprofitsoftheircrops.
IV.OnCommonMan:
5.HISTORICALREVIEWOFPAKISTAN:
Historically speaking, inflation rate is on continual increase in Pakistan
sinceitsindependence.From1961to1972,inflationratewas3.3percent
per annum. From 197274, inflation rate was 30 per cent, which was the
highest increase in the history of the country. From 197477, inflation rate
stoodat17.3percentperannumalittledeclinefromthepreviousperiod.
From197780,rateofinflationdeclinedto8.5percentperannum.During
the years 198090, inflation rate on average stood at 11.4 per cent per
annum.Duringtheyears199197,theratewasincreasedto13.9percent
per annum. During the years 19982000, inflation rate declined to 5.7 per
cent. Presently, the inflation rate has decreased from 9.3 per cent in 2005
to8percentinthemidof2006.
6.CAUSESOFINFLATIONINPAKISTAN:
I.Increaseintheflowofremittances:PPPincreases
II.Deficitfinancing:gapbetweentherevenuesandexpenditures
III.Rapidmonitoryexpansion:
IV.Foreigneconomicaid:
V.Investmentinrealestate:
VI.Lavishspendinghabits:
VII.Excessivespeculationandhoarding:
VIII.Increaseinpopulation
7.ANTIINFLATORYMEASURES:
I.Incentivestofarmers:
II.Checkoncorruption:
III.Recoveryofloans:
IV.Checkonnonproductivespending:
V.Checkonhoarding:
VI.PromotionofSundayBazaars:
VII.SuppliesbyUtilitystores:
8.PRESENTSCENARIO:
The flareup in prices over the past two years had emerged as one of the
biggestchallengesinmacroeconomicmanagement.Onthebackofthehigh
rate of economic growth generated over the last four years in succession
and in combination with negative exogenous shocks, price pressure had
built up noticeably in the economy, especially during the preceding fiscal
year (200405). In terms of generating inflation, the phenomenal rise in
aggregate demand in the economy, on the one hand, was compounded by
supply shocks on the other. The adverse external developments which
impacted the price level for the fiscal year under review included a
continuation of the surge in international price of oil to an alltime record
of nearly US $ 75 per barrel in April this year, before pulling back
somewhat, coupled with an unprecedented rise in world prices of
commodities due to demand from fastgrowing economies such as China
andIndia.AlsoimpactingpricedevelopmentinPakistanwasthedeclinein
thesizeofsugarcanecropresultinginrelativelylesserproductionofsugar
withinthecountryaswellassignificantriseininternationalpricesofsugar
owing to diversion of large portion of sugarcane into ethanol (a petroleum
substitute) by the worlds largest producer, Brazil. These factors combined

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CentralSuperiorServices(CSS)Examination,Pakistan:CausesofInflation
to spark inflationary pressers not just in Pakistan but also in the global
economy.
I.PriceDevelopingduring200506:
A sharp pickup in the prices of essential commodities and unprecedented
rise in international price of oil have led to the reemergence of
inflationary pressure across the globe. After living in a low inflationary
environment (4%) for the last five years, Pakistan witnessed higher
inflation for a verity of reasons. The higher inflationary trend in Pakistan
over the last two years has been the outcome of pressure that emanated
from demand and supply sides. Four years of strong economic growth has
given rise to the income levels of various segments of the society. The
risinglevelofincomehavestrengtheneddomesticdemandandputupward
pressureonpricesofessentialcommodities.
Supplysidepressureemanatedfromavarietyoffactors,prominentamong
those are: increase in support price of wheat for three years in row,
shortage of wheat owing to less than the targeted production,
mismanagement in wheat operation in one of the wheat deficit province,
interprovincialbanonthemovementofwheatresultinginsharpincreases
in prices of wheat and wheat flour. The prices of other food item such as
beef, mutton, chicken, milk etc also registered sharp increases owing to
sympathyeffectontheonehandanddemandpressureontheother.
Lower production of sugarcane resulting in relatively lower production of
sugar on the one hand and a sharp increase in the international prices of
sugar owing to significant diversion of sugarcane into ethanol (petroleum
substitute) by the largest producer, Brazil, also contributed in building
inflationarypressureinPakistan.Inrecentmonths,pricesofvariouskinds
of pulses also registered sharp increases owing to a significant decline in
domesticproductionaswellasshortagesininternationalmarkets,keeping
thepricesofpulsesatrecordhighlevel.
Unprecedented rise in international oil prices also contributed to the build
upininflationarypressureinPakistan.
9.ECONOMICSURVEY:
I.InflationbyIncomeGroup:
Pricehikeaffectsvarioussectionsofthesocietydifferently.Inmostcases,
the lower income group of society becomes victim of the severity of
inflation on account of their erosion of purchasing power. To assess the
impact of inflation across all income classes, the CPI is also computed for
fourincomegroupwithincomelimitsrangingfromRs.3000toRs.12,000
permonth.
II.PriceStabilizationMeasures:
In order to keep the prices of essential commodities under control, the
government has been taking various measures throughout the year. These
measuresincludeliberalimportregimeforfooditemsincludingzerorating
of imports of these commodities. The government has been expanding the
supplyofessentialitemssuchassugarandwheatflourthroughtheoutlets
of the Utility Stores Corporation (USC). Furthermore, in order to provide
relief to low and fixed income groups, the government has been selling
wheatflourandsugarthroughtheoutletsoftheUSCatmuchlowerprices
thanthemarket.Inordertoaugmentsuppliesofessentialcommoditiesat
shortesttimeandatlowerfreightcharges,thegovernmenthasallowedthe
importofvariousitemsthroughlandroutesfromneighbouringcountries.
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