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INFLATION
Abstract Summary:
The measure of the change in the price of goods or services by the time is known as inflation rate. To calculate the inflation is Change in Inflation = (Final CPI Index Value/Initial CPI Value). It is an increase in the overall price level. A small rise in prices or a sudden rise in prices is not inflation since these may reflect the short-term workings of the market. It is to be pointed out here that inflation is a state of disequilibrium when there occurs a sustained rise in price level. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings. It is controlled by policies.
Introduction:
The term inflation in an economy refers to the rise in the prices of goods and services over a period. This directly affects the economy if there is only a moderate increase, but if there is a rapid increase in long run inflation has negative impacts. It reduces the purchasing power of the individuals and devalues the currency significantly. The measure of the change in the price of goods or services by the time is known as inflation rate. As general when the price rises, the purchasing power of the consumer decreases. According to the terminology, inflation may also be referred as “the cost of living”. As the time passes, we may have seen that the cost of goods increases. Taking an example of our grandparent’s era, a cold drink used to cost PRs 5 but now the same cold drink costs PRs 45. This significant change shows that the money saved at that time would have been consumed by 1/3rd till now. Following are the most common types of inflation Stagflation Hyperinflation Galloping Inflation Creeping Inflation Suppressed Inflation
Data Collection Methodology:
The change in CPI becomes an indicator of the inflation that affects all of us. WPI indicates the change in wholesale prices which affects businesses and industries. And SPI that covers a limited number of essential items of daily use including food and fuel can be termed as the inflation for the poor The above-mentioned variants of inflation indexes can be used to calculate the value of inflation between two particular months (or years). While a lot of ready-made inflation calculators are already available on various financial portal and websites, it is always better to be aware of the
underlying methodology to ensure accuracy with a clear understanding of the calculations. Mathematically, Change in Inflation = (Final CPI Index Value/Initial CPI Value)
Discussion:
It is an increase in the overall price level. A small rise in prices or a sudden rise in prices is not inflation since these may reflect the short-term workings of the market. It is to be pointed out here that inflation is a state of disequilibrium when there occurs a sustained rise in price level. It is inflation if the prices of most goods go up. However, it is difficult to detect whether there is an upward trend in prices and whether this trend is sustained. That is why inflation is difficult to define in an unambiguous sense. There are a variety of causes of inflation; first prices rise if the supply becomes less because of workers strike, closure of factories, floods, absence of rainfall etc. When there is a shortage of agricultural products like rice, gram, wheat vegetables, and their prices also rise. In our country prices of industrial and agricultural goods have risen partly because of their shortage. Another cause of inflation is the general rise in the living standard of the people. With an increase in their income, the people need more clothes, shoes, and other things of daily use. They buy more ghee, oil, fruits and other eatables. They buy more luxury goods like electric fan, refrigerators, heater, radio and television sets. Generally, the production of goods does not increase very fast. Money used, for unproductive purposes, such as for building plazas, cinemas, hotels etc. also gives rise to inflation. It is clear that money thus spent is wasted, as it has no share in the development efforts. Prices of things on world markets' also have direct or indirect effects upon things produced in the country. We can see how prices of different things like petrol, machines, tools, iron, chemicals, paper etc. have risen on world market. Pakistan imports these, so their prices in the country are much higher than before. The prices of other things have also risen. Inflation creates not only price hike, but it also gives birth to countless gigantic problems. It makes the poor, poorer and the rich, richer. These create feelings of frustration among the workers. Continuous price rising leads to hoarding of goods by the wholesalers and retailers in the hopes of higher profits. The CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of primary consumer needs. They include transportation, food, and medical care. CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket. The prices in consideration are the retail prices of each item, as available for purchase by the individual citizens. Changes in the CPI are used to assess price changes associated with the cost of living, making it one of the most frequently used statistics for identifying periods of inflation or deflation.
Result and Interpretation:
Result:
The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. There is some evidence that inflation can push down unemployment. Wages tend to be sticky, meaning that they change slowly in response to economic shifts. John Maynard Keynes theorized that the Great Depression resulted in part from wages' downward stickiness. Unemployment surged because workers resisted pay cuts and were fired instead (the ultimate pay cut). The same phenomenon may also work in reverse: wages' upward stickiness means that once inflation hits a certain rate, employers' real payroll costs fall, and they are able to hire more workers.
Interpretation:
Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. ... Often expressed as a percentage, inflation thus indicates a decrease in the purchasing power of a nation's currency.
Conclusion and Recommendation:
Inflation impacts the multiple sectors of the economy (impact on the distribution of income and wealth, impact on production, impact on the Government, impact on the Balance of Payment, impact on Monetary Policy, impact on Social Sector, impact on Political environment) and different classes of the people (Debtors & Creditors, Salaried Class, Wages earners, Fixed income group, Investors and shareholders, Businessmen, Agriculturists). It can be controlled by a single measure; nevertheless, if monetary and fiscal measures are wisely coordinated, it can greatly help in controlling the continuous process of rising prices. All the utility stores in the country should be fully stocked with essential consumers' items to avoid any food shortage. Provincial governments should intensify their vigilance over the hoarders, Profiteers to seek smuggling and hoarding. Domestic production of essentials should be enhanced To reduce our Government Luxury Expenses both Federal and Provincial. To reassess the complete system of Direct and Indirect Taxes. To increase the Production of Food, Industry and Service things. Take benefit to public in shape of (Oil & Petrol is low than reduce the prices) Reduce Unemployment Increase in Agriculture, industry Monopoly Control System should be work accurately SBP should take major steps to control inflation
With fiscal and monetary concessions Sunday bazaars should be set up under the control of Tehsil, District and Divisional Administration. Monetary policy – Higher interest rates. This increases the cost of borrowing and discourages spending. This leads to lower economic growth and lower inflation. Tight fiscal policy – Higher income tax and/or lower government spending, will reduce aggregate demand, leading to lower growth and less demand-pull inflation Supply-side policies – These aim to increase long-term competitiveness, e.g. privatization and deregulation may help reduce costs of business, leading to lower inflation. Price stability or a relatively constant level of inflation—allows businesses to plan for the future since they know what to expect. It also allows the Fed to promote maximum employment, which is determined by non-monetary factors that fluctuate over time and are therefore subject to change. For this reason, the Fed does not set a specific goal for maximum employment, and it is largely determined by members' assessments. Maximum employment does not mean zero unemployment, as at any given time there is a certain level of volatility as people vacate and start new jobs.
