Theory of Inflation:
Inflation means a sustained rise in prices. Inflation can be Creeping, walking or trotting, running,
hyper or gallop, demand pull, cost push, mixed, markup or stagflation according to velocity and
nature. Inflation is caused by some demand side factors (Increase in nominal money supply,
Increase in disposable income, Expansion of Credit, Deficit Financing Policy, Black money
spending, Repayment of Public Debts, Expansion of the Private Sector, Increasing Public
Expenditures) and some Supply side factors (Shortage of factors of production or inputs,
Industrial Disputes, Natural Calamities, Artificial Scarcities, Increase in exports (excess exports),
Global factors, Neglecting the production of consumer goods, Application of law of diminishing
returns)
Inflation effects the different sectors of the economy (Effects on the distribution of income and
wealth, Effects on production, Effects on the Government, Effects on the Balance of Payment,
Effects on Monetary Policy, Effects on Social Sector, Effects on Political environment) and
different classes of the people (Debtors & Creditors, Salaried Class, Wages earners, Fixed
income group, Investors and shareholders, Businessmen, Agriculturists)
Inflation can be controlled by Monetary Measures (Credit Control, Demonetization of the
currency, Issue of new currency), Fiscal Measures (Curtailment in unnecessary expenditures,
Increase in rate of taxes, Increase in volume of savings, Anti inflationary budgetary policy,
Increasing public debt policy) and Non-Monetary and Non Fiscal Measures (Increase in volume
of production, Price control and rationing policy).
A near History of Inflation in Pakistan with reference to CPI, SPI and WPI: [1]
Consumer Price Index (CPI) is the main measure of price changes at the retail level. It measures
changes in the cost of buying a representative fixed basket of goods and services and generally
indicates inflation rate in the country. The Consumer price index was computed for the first time
with 1948-49 as a base for industrial workers in the cities of Lahore, Karachi and Sialkot only.
Continuous efforts have been made, since then, to make CPI more representatives by improving
and expanding its scope and coverage in terms of items, category of employees, cities and
markets. Accordingly, the CPI series were computed with 1959-60, 1969-70, 1975-76, 1980-81
and 1990-91 as base years. At present, the CPI is being computed with 2000-01 as base year.
And according to the studies of CPI, the inflation rate during the fiscal year 2000-2001 was 4.41,
during the fiscal year 2001-2002 it dropped down to 3.54, further dropped to 3.10 during the
fiscal year 2002-2003, rose again to 4.57 during 2003-2004, increased drastically to 9.28 during
2004-2005 and then dropped to 7.92 during 2005-2006. And by the mid of October 2006, the
CPI is reported to be 8.43.
The Sensitive Price Indicator (SPI) is computed on weekly basis to assess the price movements
of essential commodities at short intervals so as to review the price situation in the country. The
SPI is being presented in the Economic Coordination Committee of the Cabinet (ECC). Sensitive
price indicator was originally computed with 1969-70 as base which was subsequently switched
over to 1975-76, 1980-81 and 1990-91 as base year. Presently, the SPI is being computed with
base 2000-2001. And Sensitive Price Indicator (SPI) shows the facts as; 4.84 in 2000-2001, 3.37
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