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The Role of Inflation and Change in Consumer Buying Power

Info: 5339 words (21 pages) Dissertation
Published: 12th Dec 2019

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Tagged: EconomicsConsumer Decisions



Our cram will be paying attention at the diverse aspects of inflation in Pakistan from a local and large-scale point of view. Pakistan has undergone a most important economic growth all the way through previous few years. But the core evils of the economy are at rest unsettled; Inflation remains the most important of all these evils. In the case of an Asian country, Pakistan inflation is the end result of monetary phenomena. The excess money supply increase in Pakistan has in essence improved inflation. Inflation is a get higher in the general level of prices of goods and services in an economy over a period of time. When the general price level grows; each unit of currency buys less goods or services. Inflation doesn’t on its own pressure the macroeconomic indicators; it influences the living standards of the nation. As the percentage of inflation enhance, the cost of all commodities also enhance. It can also be described as a turn down in the real value of money—a thrashing of purchasing power.

The level of inflation in Pakistan has been bit by bit getting higher since partition. The high levels of inflation imitate an unstable economy in which money does not hold its value for long. Workers have need of higher remuneration to cover up getting higher costs, and are disinclined to save. Manufacturer in turn may move up their selling prices to cover up these increases, scale back production to check their costs (resulting in lay-offs), or be unsuccessful to invest in future production. Many such problems have been, and still are, being faced by Pakistan. The issues leading to high levels of inflation include deficit financing, foreign remittances, foreign economic support, increase in wages, population explosion, black money, prices of imported goods, devaluation of rupee, etc.

1.2 Purpose of Study:

The main purpose of this study is to be familiar with and learn about global real meaning of role of inflation and its impact on Pakistan economy and more paying attention towards inflation affect on different sector. In this study, we studied about the factors causing inflation. It will be of great help out to students of economics and business studies. The study provides as much as necessary learning opportunities that one for all time looks for and such opportunities turn very healthy in terms with understanding the subject which is under study.

1.3 Research Objectives

  1. Present the set-up of inflation in Pakistan.
  2. Underline the figures of recent years.
  3. Impact of inflation on our society.
  4. Cram the procedures that have been taken by government to supervise inflation.
  5. Evaluate policies of the State Bank of Pakistan and the tools it is using to supervise inflation.
  6. Give recommendations to control inflation.

1.4 Research Methodology:

In this research, we contain data from primary and secondary sources. Data used in this study are obtained from KSE 100, State bank of Pakistan, federal bureau of statistic; stock price index etc…The information required for our research consists of details about recent and past policies of State Bank of Pakistan. Research instruments for this study included, interviews from economists, columnists and other relevant people. The sources of information or data on the Inflation collected all the way through variety of ways in different setting. It also contains very well points about other variables affecting inflation. For this, we aim to gather secondary data, all the way through websites, economic surveys and the journals. However, if required, we can also make use of primary data in the forms of interviews and surveys. Analysis of data would be done by with awareness studying the collected data. A to the point explanation of the format of the results will be presented in the following forms, e.g.

  • Pie charts
  • Line graphs
  • Tables

Study Period/Division of Time for Project

Number of weeks

Work done

Preparation, submission and acceptance of proposal

3 weeks

Data collection

5 weeks

Data analysis

4 weeks

Report preparation

4 week

The possible limitations in our research would be;

  • Time constraint
  • Knowledge constraint
  • Data constraint



Inflation means get higher of general level of price of goods and services in the economy over the period of time. Inflation occurs when the demand of goods will be getting higher as compare to the supply of that good. If the supply is not equilibrium (or less) to the demand of goods and services so the prices will be high. Inflation will also occur when the cost of production will rice or increase price on raw material so the manufacturer increase the finished good prices. Inflation impact negative effect on economy for the reason that it decrease the real value of money.

Consumer buying power means how the people spend money on goods and services or purchase the product on a specific availability of money or wages. There are two factors that affect the consumer buying power. (1).Every person wants to spend money for his basic needs or for his luxuries and entertainment for example: (food, house, car, clothing, entertainment etc.). But the buying power will change every year for the reason that of inflation. It will be happened for the reason that of the product price will increase every year or you can say that decrease the value of money. (2).Consumer buying power will also be change for the reason that of monthly wages. If monthly wages is increase or the product or commodities price is same then consumer go for in addition activity but if the wages is not increase only increase the product or commodities price so the effect is occur on consumer buying power. They are only going for basic needs not for the luxuries etc.

ALEEM, KALIM (2007) Inflation is get higher in Pakistan for the reason that of mismanagement and loose control on monetary policy and fiscal policy. In monetary policy state bank will issue the supply of money or if supply of money is not manage by state bank efficiently so it’s affect on inflation or in fiscal policy government apply the taxes on private sector. In 2005-06 inflation will be get higher and fall for the reason that of loose monetary policy. Now in Pakistan recent government apply expansionary policy. In this policy government will increase the interest rate to control the inflation or consumer buying power.

Getting higher oil prices in the market will also increase the price on food items or commodities. Inflation in Pakistan wills also occur for the reason that of sharp increase in net import. The gab between in domestic demand and domestic production is filled import items. Comparison between import and export in Pakistan there is no balance of trade or balance of payment. Getting higher trade deficit can be a cause of expectation of high inflation.

ABDUL (2007)this author tells us that monetary policy are playing very important role for increasing inflation or how to control inflation. Monetary policy successfully controls inflation when it successfully controls money supply in the market. Monetary policy calculates the money supply with the help of M2 (cash and checking account deposit + saving deposit and money market accounts).

But state bank of Pakistan is failed to have power over money supply last few years that why inflation is get higher in Pakistan. But now in Pakistan state bank will increase the interest rate to have power over the inflation in Pakistan. Increasing the amount in interest rate will affect demand for credit to the business sector and also affect the money market rate. Increasing the amount in interest rate also affect the demand on commodities.

FAROOQ (2008)this author tells us that political instability is effect the inflation. Monetary policy will be effect for the reason that of political instability. If the political sector is stable in Pakistan so inflation will may be have power over for the reason that state bank will do supply of money in the market by the manage way.

Political instability is a negative effect for the economy for the reason that of variable GDP growth, private investment and inflation. Political stability is very important for the economic development of a country. Political stability discourages speculation and hoarding and encourages investment. If there is an unexpected twist in the political situation of a country become entrepreneurs reluctant to invest. Just as foreign investors do not invest, at the same time as industrialists and businessmen feel uncertain and can not make good plans. Due to the scarcity of goods and services are produced and cause inflation

MOHSIN (2006) After forecast that is why inflation is go up in Pakistan we check up that for the reason that of variable monetary policy means variable money supply in the market or given high credit to private sector not only this also charge the variable interest rates. Every time state bank (central bank) was not made a good monetary policy as well as they didn’t manage the supply of money in the market. When ever the state bank drop off the interest rate so private sector will borrow the loan from the bank or in this case private sector credit will be increase or supply of money will also increase in cooperation growths are good leading indicators of inflation.

Inflation will be control by using these four ways which are under below.

  • Get higher in the interest rates is a very useful tool for restricting monetary inflation. Increase in the real rates of interest decreases the demand for loans, thereby limiting the growth of broad money.
  • There may also be a fall in the commercial investments, due to a get higher in the costs of borrowing money. This exerts a direct influence on a handful of planned investment-related projects, which turn out to be unprofitable. This leads to a fall in the collective demand.
  • An increase in the payment of mortgage interests automatically decreases the real ‘effective’ disposable income of the house owners, as well as their spending capacities. Escalation in the mortgage costs also decreases the demand generated in the housing markets.

ABDUL QAYYUM (2006) this author tells us the relation between excess money supply growth and inflation. Excess money supply will be happened for the reason that of loose monetary policy which is making by the government or state bank of Pakistan. Money supply growth will effect on the inflation. First supply growth will affect on gross domestic product (GDP). It will happened for the reason that when the consumer buying power will increase so demand will also increase or if supply is less than with demand so prices of commodities will be get higher and fall. So government or state bank makes the affective monetary policy then the inflation will be under have power over.

Growth of population is also increase the inflation in the country for the reason that of increase in demand of goods and services or if demand of goods is greater than the supply as a result the prices will be increase in the GDP commodities. Due to the imbalance between supply and demand of goods and services, prices start to get higher and triggering inflation.

JIAN ZHANGThe consumer buying power will depends upon the prices of goods and services. If the prices of goods and services are not high so consumer purchasing power will increase. Buying power will also depend on supply of money means (monetary policy). If supply of money in the country is high so consumer buying power will also increase.

Buying power will also depends on wages. If the consumer wages is not increase only increase the price on commodities so buying power will be get higher and fall or decrease. If the wages is increase or commodities price is not increase so the buying power will be increase.

Recently china will increase consumer buying power for the reason that of giving goods or services in very low prices.


3.1 Introduction

3.2 Types of Inflation

3.3Inflation in Pakistan

3.4Impact of Inflation in Pakistan


3.1 Introduction

Inflation is a get higher in the general level of prices of goods and services in an economy over a period of time. When the general price level get higher; each unit of currency acquires less goods or services. as a result; inflation also reflects abrasion in the purchasing power of money. An increase in the supply of money relative to the availability of goods and services, resulting in higher prices and decrease in the purchasing power.

There are many definitions of inflation. By inflation most people be aware of a sustained and substantial get higher in prices. For example:

W.A.L COULBORN’ words: “too much money chasing too few goods”.

Prof SAMUELSON, “Inflation occurs when the general level of prices and costs is getting higher”.

According to ROWAN, “inflation is the course of action of price increase”

HARRY G JOHNSON, “We define inflation as substantial increase in prices”.

According to CROWTHER, “inflation as a state in which the value of money is falling”.

According to MEYER, “An increase in the price that occurs after full employment has been attained”.

According to KEYNES, “The get higher in general price level after full employment had been achieved is called inflation”.

3.2 Types of Inflation

Following are the types of inflation:

  1. Creeping inflation.
  2. Walking inflation or Mild inflation.
  3. Running inflation.
  4. Galloping or Hyper inflation.
  5. Demands pull inflation.
  6. Costs push inflation.
  7. Mixed inflation or Wage spiral inflation.
  8. Open inflation.
  9. Suppresses inflation.
  10. Profit induced inflation.
  11. Budgetary inflation or Deficit inflation.
  12. Monetary inflation.
  13. Income inflation.
  14. Production inflation.
  15. Devolution inflation.
  16. Imported inflation.
  17. Ceiling inflation.

3.2.1 Creeping InflationIt is a situation where the increase in the price level is very slow. In creeping inflation the get higher in price level is up to 2 % p.a.

3.2.2 Walking Inflation or Mild InflationWhen the rate of inflation is reasonable, not too high not too low. The get higher in price level is about 5 % p.a. This type of inflation has healthy effect on economy.

3.2.3 Running InflationIn this type of inflation, the general price level increase more sharply than the previous type. The get higher in price is about 8 to 10% p.a.

3.2.4 Galloping or Hyper Inflation When prices are getting higher at abnormal high rate, it is called hyper inflation. This type of inflation was experienced in Germany after Second World War. The price level increase many hundreds time and the purchasing power of people fell to very low level. This type of inflation is very dangerous.

3.2.5 Demand Pull InflationWhen inflation is due to excess of demand over aggregate supply, it is called demand pull inflation. Excess of aggregate demand pulls the price upwards. Aggregate demand exceeds aggregate supply due to following reasons:

  1. Population explosion.
  2. Increase in exports.
  3. Structural backwardness.
  4. Increase in supply of money.
  5. Increase in income of people.
  6. Mass migration.
  7. Wars.

3.2.6 Cost Push InflationIt means a condition where prices are growing due to move up in the cost of production even if there is no increase in aggregate demand. Increase in costs pushes the price in the air. Cost push inflation occurs due to following reasons:

  1. Increase in wages.
  2. Increase the price of raw material.
  3. New taxes.
  4. Devaluation.
  5. Increase in energy prices.

3.2.7 Mixed Inflation or Wage Spiral InflationIt is the mixtures of demand pull and cost inflation. Originally prices get higher due to excessive increase in aggregate demand. Increase in raises the cost of living of the workers. In order to pay compensation high cost of living, worker demand for high wage rates. Demands for high wage rate are accepted during the period of getting higher prices. Increase in wages will move up the cost of production. For that reason increase in wages will push the price upward. Combined effect of wages and prices creates hyper inflation.

3.2.8 Open InflationIt is a situation when the inflation gets out of control and cannot be controlled by government price control policy is called open inflation.

3.2.9 Suppressed InflationIt is the situation when the inflation can be controlled by the government price control policy.

3.2.10 Profit Induced InflationWhen businessmen tend to increase their profit and increase the price of their commodities then their will be profit induced inflation. It is usually occurs in such economy which are dominated by monopolies. Monopolist is in the position to increase the price of his product at his will.

3.2.11 Budgetary Inflation or Deficit InflationWhen the revenue of the government is less than its expenditures, it is said to run budgetary deficit. To overcome this deficit govt. makes borrowing from internal and external source to increase the supply of money. Higher supply induced more consumption causing price level to high.

3.2.12 Monetary InflationWhen there is an spreading out in the currency notes in circulation then there will be monetary inflation.

3.2.13 IncomeInflationThe inflation which occurs from high income level is called income inflation. In consumption oriented society where propensity to consume is higher than propensity to save such higher income will bring on people to use up lavishly on consumer goods.

3.2.14 Production InflationThis inflation aget highers due to be short of of capital projects. If the course of action of industry is slow as compared to rare of growth of population, then soon the economy would be not capable to meet up all the needs of its members. Shortage of goods creates higher demand which forces the price to up.

3.2.15 Devaluation InflationDevaluation makes our currency not expensive in terms of foreign currency. It also makes all those goods cheap whose prices are in rupees. Further the exports of the country increases. Such increase in exports increases the profit and income of local exporters. It leads to inflation.

3.2.16 Imported InflationIt means the inflation that aget highers due to increase in the price of demand goods. Suppliers in foreign countries may increase the prices of their products. This will affect the domestic consumers and producers. They will be compelled to increase the price of goods. It will create inflation.

3.2.17 Ceiling Inflation that occurs due to a variety of ceiling prices of government. Ceiling prices are set by the government to maintain prices of essential goods. Price is seized below the equilibrium to maintain prices of essential goods. Prices are seized lower than the equilibrium price level of free market. However, the price ceiling from time to time invites black marketing. It may cause inflation.


Inflation during 2005-06

Inflation picked up to an average of 8.6% per annum for the duration of the last two years (2004-05 and 2005-06) for a variety of reasons. First and foremost was the extraordinary increase in international price of oil which more than doubled for the duration of the last years; reaching an all time high of $78/bbl. The increase in international oil prices, as a result contributed to the pick up in inflation during the last years. Next issue has been the surge in demand; which put force on prices. Four years of well-built economic growth (on average, 7.0% per annum) gave increase to the income levels of different segments of the society; which supported domestic demand and put getting higher pressure on prices of necessary commodities.

The government had taken numerous actions to bring inflation downward during 2005-06. These actions included the tightening of monetary policy as well as enhancing the supply of necessary commodities through liberalizing of import command. As a result the on the whole inflation registered a turn down from 9.3% in 2004-05 to 7.9 in 2005-06. The majority importantly; food inflation declined from 12.4 to 6.9 during the same period. Non-food inflation on the other hand registered an increase from 7.1 to 8.6%. In 2006, the development in non-government sector borrowing was 23%. This development is reflected in the role of NGSB in inflation; which was 35% in 2005-2006. One significant issue is import prices; which explains 26.7% of the inflation in 2005-2006.

The government levies did not cause any most important get higher in prices in 2005-2006. There was no additional strong force on import costs, for the reason that of a constant exchange rate, such policy cannot be continued for long at the same time as trade shortfall set the way.

Inflation during 2006-07

In year 2006, core inflation from 7.1% in June 2006 came down to 5.5% in December 2006; due to the tighter monetary position. The CPI-based inflation during July-April 2006-2007 averaged 7.9% as against 8% in the same period last year. The single biggest element of the CPI is the food group; which showed an increase of 10.2%. This was higher than the 7% food inflation observed over the corresponding period of last year. According to the State Bank of Pakistan, the food inflation during the period increased for the reason that of supply side constraints. On the other hand, the non-food prices grew at a slower pace compared to last year. The non-food inflation averaged 6.2% between Julys-April 2006-07 while it stood at 8.8% in the corresponding period of last year. The non-food non-energy inflation (core inflation) decelerated sharply to 6% in first ten months of the fiscal year as against 7.7% in the same period last.

The tight monetary policy pursued by the SBP has resulted in the sharp reduction in the core inflation. A more detailed analysis of the food group shows a considerable variation in inflation rates of the items included in the group. For example, considering the perishable and non-perishable items in the food group separately shows that nonperishable food prices rose by 9.0% while the perishable items prices grew by 17.6%. The estimated contributions to inflation for perishable and non-perishable items are 11.5% and 40% respectively when their weights are 5.14% and 35.2% respectively. Clearly, the contribution of perishable items to inflation is nearly twice its weight. An analysis of individual food items suggests that the major portion of food inflation during the current year stemmed from a limited number of items including rice, edible oil, pulses, meat, milk, tea, eggs, wheat, vegetables and fruits. These items have experienced relatively larger increase in their prices during the course of 2006-2007. However, prices of other important food items like sugar, potatoes, tomatoes, Moong pulse and chicken (farm) have shown a decline in their prices owing to improved availability of these items in the market.

Inflation during 2007-08

Pakistan’s inflation in 2007 remained virtually unaffected from the 2006 rate, standing at 7.8%. The inflationary trend in food prices persisted through most of the fiscal year and was even higher, at 10.3% in 2007, affecting people living on low and fixed incomes. The analysis suggests that the inflation was for the most part food price driven. Prices of a variety of types of pulses have increased this year for the reason that of the short supply of these pulses in the country. In view of the fact that milk powder and tea are also importable items, the domestic prices were higher on the back of higher international prices.

The inflation in 2007 was fuelled by worldwide increases in a variety of goods prices, higher utility tariffs and by local supply- and demand-driven issues. To include food inflation; Pakistan’s government extended the public-sector utility-store network, extending it even into rural areas. All the way through the network the government provides large subsidies for the sale of necessary edibles. The central bank reacted to high inflation by tightening monetary policy; it concurrently raised the discount rate; the cash necessity on demand deposits and the statutory liquidity requirement of demand and time deposits. In view of the other CPI groups; the maximum inflation was in the Medicare group and energy with reported 10 month inflation of 9.1% and 7.3% respectively. But in view of the fact that their weights are small in the CPI basket (2.1% and 8.7%) their contribution to inflation was small. On the other hand; house rent which has a 23.4% weight in the CPI; showed a go down in inflation from 10.3% to 6.7%.

Inflation during 2008-09

A delay in including more areas and in revising consumption patterns for measurement of inflation has helped the government to cover up real inflationary pressures in the economy, claimed Dawn. Earlier than the start of the year; the government had finished the family budget survey; launched in July 2007 for the purpose of revising the base for measurement of inflation. The exercise was delayed for years on the pretext of non-availability of funds. A senior official at FBS said that the excuse of non-availability of funds for conducting survey to revise the base year of CPI was unjust for the reason that the government had started a number of other surveys and projects, reported Dawn.

Analysts say the government wanted to carry on with the previous model for the reason that it was based on a survey of urban areas only; ignoring rural consumers who compget higherd 70% of the whole population. In addition; a lot of objects covered by the survey are either obsolete or their consumption has declined drastically with the passage of time. The present average rate of inflation is around 25% and if the base year is revised it will go up to over 30%.

This remarkably high trend is primarily a reason of high food inflation. Inflation for the duration of 2008 point out that prices of a few (18) necessary food items registered quick increase mainly for the duration of the second half of the fiscal year 2008. Other major contributors to 2008’s getting higher inflationary trend included house rent, which is the index that measures the cost of production in Pakistan, racing to 11.35% by April 2008.

Inflation during 2009-2010

According to the Inflation Outlook covering the period of January-June 2009, the inflation is expected to be in the range of 21.3 percent in the current month of January 2009 as against 11.9% in January 2008. According to a Projection, presented Economic condition committee of the Cabinet meeting held on January 13, 2009 inflation was calculated at 24.3 percent at the start of July in 2007. According the reserve, the reason of Inflation is the continuation of year 2010. The Survey discovered that public was expecting that Inflation would increase in future. It showed that demand-pull, cost push, structural issues were responsible for current inflation in Pakistan and the government policies were not useful to enhance growth.

In progress reason of inflation consist of demand, pull, cost push, structure inflation. The survey discovered that cost-push issue was much responsible for causing inflation. The contribution of cost push inflation was 29.1% followed by demand-pull factor (14%), structure issues 13.5%. Collectively; all the three issues were contributing about 56.1% to in progress inflation.

Inflation during 2010-2011

According to the assessments of analysts and researches; food inflation is the most important reason behind the speedy inflation. The CPI inflation turned out higher than expectations as it rose by 13.23% on yearly basis (2.51% on monthly basis) during the month of August 2010. Food inflation, for the duration of August 2010 increased by 15.62% on yearly basis (5.10% on monthly basis). As well, food inflationary impact contributed as much as 91% of the total monthly basis CPI inflation. Items that exceeded expectations included perishables such as vegetables as well as ghee. This reinforces that existing inflationary pressure is due to food inflation. The same provides support to the argument that an upward revision in discount rate should not aged higher out of inflationary concerns.

The government borrowings have also stayed within handy bound so far, although it runs the risk of getting higher upon fiscal concerns (deficit of 6.5% for FY11 is already projected).This only shows to be the single most major issue in driving the interest rate direction for FY11.CPI inflation has clocked in at 13.23% on yearly basis in August 2010; slightly high than the forecast of 12.85% yearly and against 12.34% yearly in July 2010. With a joint weight of 55% in the CPI basket, food, energy, transport inflation rose by 15.62%, 21.29% and 14.27%, respectively on yearly basis.The State Bank of Pakistan has recently followed a policy of headline inflation targeting. In this regard; higher than projected CPI in August 2010 and likely up tick above 15% on yearly basis in Sep 2010 may guide to an upward force on the discount rate going ahead; mainly if the SBP maintains its anticipatory position and sidelines down trending core inflation.

Table: Annual Rate of Inflation (Percentage) in Pakistan for Period 2004-2011


Inflation rate (consumer prices)


Percent Change

Date of Information


2.90 %


-25.64 %

2003 est.


4.80 %


65.52 %

FY03/04 est.


9.10 %


89.58 %

2005 est.


7.90 %


-13.19 %

2006 est.


7.60 %


-3.80 %

2007 est.


20.30 %


167.11 %

2008 est.


13.60 %


-33.00 %

2009 est.


13.40 %


-1.47 %

2010 est.

Graph: Annual rate of Inflation in Pakistan for Period 2004 to 2011

3.4 Impact of I

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