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Inflation rate to be higher than target:
PIDE survey
Tariq Khattak
Islamabad—A survey conducted by Pakistan Institute of Development Economics (PIDE) says that Inflation rate during the current year will remain higher than target rate of nine per cent. According to the finding released here today, 89 per cent of the respondents believe that inflation rate during current year will be higher than target rate. Whereas, 5 per cent are of the view that it will be lower and 6 per cent say that it will remain the same.
The respondents indicate that on average 14.39 per cent is the expected rate of inflation for the next month, 15.79 per cent for the next six months and 14.58 per cent for the current year.
During March 2009 to March 2010 expectations about inflation show declining trend consistently. The current year expectations about inflation are 14.58 per cent as compared to 22 per cent last year according to the majority of the respondents. In response to question related to the nature of current inflation, 28.4 per cent of respondents believe that it is cost push inflation, while 10.6 per cent say it is demand pull. However, 53.2 per cent believe that demand pull, cost push and structural factors are the main sources of current price hike.
According to 28.4per cent of respondents, oil prices are the main contributing factor of high inflation, followed by food prices (26.3 per cent). In addition to oil and food prices, other factors contributing to inflation are utility prices, money supply and global financial crisis. Majority of the respondents (63.6 per cent) suggest that coordination between monetary and fiscal policy is necessary to control inflation rather than solely rely on monetary or fiscal policy. However, 34 per cent of the respondents consider that monetary policy is an effective tool to control inflation, and only 19 per cent suggest that fiscal policy is the most important tool for price stability. These findings are consistent with the findings of previous two surveys which reflect the strong opinion of the experts about coordination of fiscal and monetary policies to control inflation.
As far as question regarding the consumer prices in the next year is concerned, 55.6 per cent of respondents think that consumer prices will rise more rapidly, 23.9 per cent are of the view that it will increase at the same rate, while 2.1 per cent of the respondents think that consumer prices will remain the same for the year 2010-2011.
In view of 89.4 per cent of respondents, law and order situation affects inflation expectations, while 7.7 per cent are of the view that law and order has no impact on inflation expectation. To control inflation, State Bank of Pakistan is pursuing high interest rate policy. When question asked, what is best for the economy i.e. high or low interest rate, in view of 67 per cent respondents, low interest rate is better for the
economy, whereas only 14.8 per cent respondents say that in current inflationary situation high interest rate is better for the economy.
In response to question regarding expectations about exchange rate for the next month and the next six months, large group (49.3 per cent) of respondents expect that domestic currency will depreciate in the coming month, while 30.3 per cent of respondents think that value of domestic currency will remains the same.
For the next six months, 28.4 per cent of the respondents expect that the exchange rate will appreciate, whereas 60.4 per cent predict that it will depreciate and the remaining is of the view that there will be no change. These observations show that majority of the respondents believe that exchange rate will depreciate in the future.
As far as unemployment is concerned, 58.7 per cent of respondents think that unemployment will increase in the next six months. According to 63 per cent of the respondents, unemployment will increase in next 12 months. Majority of the respondents (43.4per cent) are of the view that growth rate will increase as compare to the current growth rate, 26.2 per cent says that it will decrease, while others say that it will remain the same.
About 50 per cent of the respondents are of the view that current government policies are not sufficient to enhance growth, 10.4 per cent says that these policies are useful, while remaining are not clear about the government policies.
Pakistan Inflation Rate
The inflation rate in Pakistan was 12.91 percent in March of 2010.
Inflation rate refers to a general rise in prices measured against
a standard level of purchasing power. The most well known
measures of Inflation are the CPI which measures consumer
prices, and the GDP deflator, which measures inflation in the
whole of the domestic economy. This page includes: Pakistan
Inflation Rate chart, historical data and news.
Read more: http://www.tradingeconomics.com/Economics/Inflation- CPI.aspx?Symbol=PKR#ixzz0npE3VfrR
Pakistan Inflation Rate
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Inflation Rate Definition
In mainstream economics, the word “inflation” refers to a general rise in prices measured against a standard level of purchasing power. Previously the term was used to refer to an increase in the money supply, which is now referred to as expansionary monetary policy or monetary inflation. Inflation is measured by comparing two sets of goods at two points in time, and computing the increase in cost not reflected by an increase in quality. There are, therefore, many measures of inflation depending on the specific circumstances.
The most well known are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.The prevailing view in mainstream economics is that inflation is caused by the interaction of the supply of money with output and interest rates. Mainstream economist views can be broadly divided into two camps: the "monetarists" who believe that monetary effects dominate all others in setting the rate of inflation, and the "Keynesians" who believe that the interaction of money, interest and output dominate over other effects. Other theories, such as those of the Austrian school of economics, believe that an inflation of overall prices is a result from an increase in the supply of money by central banking authorities.
What explains the current high rate of
inflation in Pakistan?
Pakistan Development Review, Winter, 1995 by M. Aynul Hasan,
Ashfaque H. Khan, Hafiz A. Pasha, M. Ajaz Rasheed
Next
- INTRODUCTION
One of the most significant developments in the current economic scene in Pakistan has been the sharp increase in the rate of inflation. The annual average rate of increase in the wholesale price index (WPI) during the first seven months (July-January 1994-95) of the current fiscal year has been about 19 percent as opposed to 11.3 percent during the same period last year. A similar increase was also witnessed in the consumer price index (CPI) which accelerated to 13 percent as opposed to 11.1 percent during the previous period. Such a sharp increase in prices in recent months has not only caused alarm in the academic circles but has equally disturbed the country's chief executive, the Prime Minister.
The recent surge of inflation is a matter of serious concern for a variety of reasons. First, Pakistan has been a low-inflation country as it has experienced price stability during the last three decades. The rate of inflation, as measured by an increase in the WPI, averaged 2.6 percent during the 1960s. The components of the WPI, i.e., food, raw materials, manufactures, and fuel and lubricants, also grew by an average rate ranging from 2.0 to 3.4 percent p.a. during then 1960s (see Table 1 for relevant statistics). The rate of inflation crossed the single-digit threshold during the 1970s. The WPI and its components increased at an annual average rate ranging from 12 to 18 percent. The double-digit inflation during the 1970s has been the result of two major oil shocks, a massive devaluation of currency, and devastating floods destroying agricultural crops. Pakistan returned to the fold of the single-digit inflation during the 1980s. The rate of inflation remained at the single-digit level during the first three years of the 1990s with the
exception of 1990-91, when the rate of inflation increased to 11.7 percent as a result of the Gulf War. It is only during the outgoing fiscal year and in the current year that the rising inflation is posing a major threat to macroeconomic stability.
The recent inundation by inflation is a phenomenon to which the people of Pakistan are not accustomed and, hence, it is a major concern for the policy-makers.
Secondly, high and rising inflation poses a serious threat to savings and growth. A high rate of inflation reduces the real return on financial assets, thereby discouraging savings, on the one hand, and encouraging the accumulation of non-financial assets, on the other. Given Pakistan's limited access to international capital markets, lower savings would lead to lower investment and slower growth.
Thirdly, high inflation rate erodes a country's external competitiveness by appreciating the real exchange rate and, thus, acts as a drag on exports and undermines the government's efforts to improve the trade balance. (1) In such an event, a sharper depreciation of the currency may become necessary which may further accelerate the rate of inflation.
Finally, high and rising inflation hurts the poor and fixed-income groups mostly owing to the higher proportion of their incomes being devoted to food items. The weight of food price in WPI is almost 53 percent. The government responded to the challenge of rising inflation mostly by concentrating on the demand management policy, i.e., by reducing the budget deficit as well as borrowing from the banking system, keeping the money supply growth close to the growth of the nominal GDP and moderating the rate of currency depreciation. The persistence of high and rising inflation clearly indicates that the government's efforts to reduce inflation have not been successful. In September 1994, the Prime Minister, through her directive, asked the Pakistan Institute of Development Economics (PIDE) to study the causes and cures of high inflation rate in Pakistan. The PIDE responded to the directive by identifying key factors responsible for the high rate of inflation [see Naqvi, et al. (1994)]. These factors are: (i) increase in the prices of food, raw materials, fuel, manufactured goods; (ii) inflationary expectations; and (iii) the growth rate of money supply in relation to the GDP. Naqvi, et al. (1994) ranked the price of food as the most important causative factor followed by inflationary expectations. The growth in the money supply was relatively less important, partly because its impact is felt with a one-year lag.
The general perception about the causes of the recent surge in inflation points to many other factors such as increase in indirect taxes (sales and excise), excess money supply, currency depreciation, supply shocks like virus-induced reduction in cotton output and weather-induced lower wheat crop, higher agricultural support prices, increases in the prices of utilities, production losses due to power and infrastructural bottlenecks, increases in wages and salaries, as well as inflationary expectations. Though a recent study by ABN AMRO Bank (hereafter the Bank) considers the food supply shocks and adjustments in administered prices as important factors, they still blame the insufficiently tight financial policies for the recent surge of inflation. In particular, the considerable
Inflation and its impact on the Pakistan economy
Changes in the exchange rate and the prices of goods and services
By Parveen Zaiby
I nflation is the rise in the prices of goods and services in an economy over a period of time. When the general price level rises, each unit of the functional currency buys fewer goods and services; consequently, inflation is a decline in the real value of money — a loss of purchasing power in the internal medium of exchange, which is also the monetary unit of account in an economy. Inflation is a key indicator of a country and provides important insight on the state of the economy and the sound macroeconomic policies that govern it. A stable inflation not only gives a nurturing environment for economic growth, but also uplifts the poor and fixed income citizens who are the most vulnerable in society.
Causes of inflation
It has been generally agreed by the economists that high rates of inflation and hyperinflation are caused by an excessive growth in the supply of money. Today, most economists favour a low steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilising the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.
There are many causes for inflation, depending on a number of factors. For example, inflation can happen when governments print an excess of money to deal with a crisis. When any extra money is created, it will increase some societal group’s buying power. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. All sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. To compensate, some merchants raise their prices. Others don’t offer discounts or sales. In the end, the price level rises. This is called demand-pull inflation, in which prices are forced upwards because of a high demand, and excessive monetary growth. For inflation to continue, the money supply must grow faster than the real GDP.
Another common reason 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 their profits, this kind of inflation is call cost-push inflation. Furthermore, rising labour costs can also lead to inflation, because workers demand wage increases, and companies usually chose to pass on those costs to their customers, this sort of inflation is called wage-push inflation.
Inflation can also be caused by international lending and national debts. 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. A deep drop of the exchange rate can also result in inflation, as governments will have to deal with differences in the import/export level.
Finally, inflation can also be caused by federal taxes put on consumer products. As the taxes rise, suppliers often pass on the burden to the consumer; the catch, however, is that once prices have increased, they rarely go back, even if the taxes are later reduced.
Effects and measurement of inflation
The most immediate effects of inflation are the decreased purchasing power of the rupee and its depreciation. Depreciation is especially hard on retired people with fixed incomes, as spending power decreases each month. Those not on fixed incomes are more able to cope, because they can simply increase their income. Another destabilising effect of inflation is that some people choose to speculate heavily in an attempt to take advantage of the higher price level. Because some of the purchases are high-risk investments, spending is diverted from the normal channels and some structural unemployment may take place. Finally, inflation 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. Inflation weakens the function of money as storage of value, because each unit of money is worth less with the passing of time. The progressive loss of the value of money during a period of inflation makes the borrowers to be less willing to use the money as standard differed payments.
To measure the price level, economists select a variety of goods and construct a price index such as the consumer price index (CPI). This is one measure of inflation. The CPI measures inflation as experienced by consumers in their day-to-day living expenses; it is the ratio of the value of a basket of goods in the current year to the value of that same basket of goods in an earlier year. By using the CPI, the inflation rate can be calculated. This is done by dividing the CPI by the beginning price level and then multiplying the result by 100. The GDP deflator is another very important measure of inflation as it measures the price changes in goods that are produced domestically.
Pakistan publishes four different price indices, namely: the consumer price index (CPI), the wholesale price index (WPI), the sensitive price index (SPI) and the GDP deflator. The CPI is the main measure of price changes at the retail level. It indicates the cost of purchasing a representative fixed basket of goods and services consumed by private households. In Pakistan, the CPI covers the retail prices of 374 items in 35 major cities
