Introduction What is Inflation? Inflation is the rate at which the cost of goods and services rises over time. When inflation rises, the value of the money goes down because consumers aren’t able to buy as much as they previously could with that same money. (Brooks)Increase in the price level1 of goods and services in a specific economy over a period of time is Inflation. The monetary value or real value of a currency falls because of the increase in prices.
Inflation can also be described as a decrease in purchasing power2 of money and a decrease in the real value3 of the bills, coins or any other form of medium to exchange in that economy. Calculating Inflation Rate: Suppose you are given with the present CPI4 and the CPI that was before this actual CPI. Then you can calculate the inflation Rate. Suppose A is the starting number and B is the ending number then the formula would be like this Equation 1v (Inflationdata.com) B Is theprevious CPI and A is the presentCPI. Different Perspectives: Meyer:”An increase in theprices that occurs after full employment has been attained.” Ackley: “A persistent andappreciable rise in the general level or average of prices.” Crowther: “In the state ofinflation the prices are raising i.
e. The value of money is falling.” Co’ulbourn: “In inflation, too much money chases too fewgoods.
” Inflation is aNecessary Evil: · Controlled inflationis a necessary evil if it supports economic growth. Inflation happens due toincrease in demand in market. As prices have increased and demand is good inthe market, the production is increased to meet the greater demand and increaseprofits. · As a result,production increases, level of employment rises, income rises, GDP rises whichis economic growth. Figure 1 Inflationand Economic Growth Types ofInflation: Figure 2 1) Demand Pull Inflation: · This type of inflation assuggested by the heading simply means that if demand is greater for a product,the its price will rise. 2) Cost Push Inflation: · Increase in prices willincrease the cost of production as well. This results in inflation and thistype of inflation is called Cost Push Inflation. 3) Structural Inflation: · The prices rise in anexpanding country as supply cannot meet the demands because of rigidities inthe structure.
This is structuralism argument of inflation. 4) Imported Inflation: · In such inflation localgovernments are helpless; it is due to an increase in the prices of importedgoods. To control it government may bans the imported items. 5) Open Inflation: · If there is no controlover rise in prices, it will be determined by free forces of demand and supply. Degrees of Inflation: Figure 3 Degrees ofInflation 1) Moderate Inflation · When the rate ofinflation is very low, it is moderate inflation. It is in the range of 1% to20%.
Ø If its rate is less than5 %, then it is creeping inflation.Ø If its rate is more than5 %, then it is called trotting inflation. 2) Galloping Inflation · If the rate of inflationis greater than 20 %, then it is called as galloping inflation. The upper limitof galloping inflation may roughly be defined as 1000 %. 3) Hyper Inflation · When the rate ofinflation is even greater than a 1000%, the degree of inflation is called asHyper Inflation. INFLATIONIN DIFFERENT COUNTRIES Inflation in Pakistan: · Inflation is a veryserious problem faced by Pakistan today as the rate is very high.
According toeconomic survey 2009-10, its rate is 13.3 %, while it was 22.3 % in last fiscalyear5.
According to ESP 2011-12,rate of inflation (CPI) is 10.8%. Table 1Historic Trend of Inflation in Pakistan (Pakistan Bureau of Statistics) Historic Trend In Pakistan Year Inflation % 1960s 3.2 1970s 12.
5 1990-97 11.4 2002-03 3.1 2003-04 4.6 · The following statistic shows the average inflationrate in Pakistan from 2012 to 2017, with projections up until 2022.
In 2017,the average inflation rate in Pakistan amounted to about 4.15 percent comparedto the previous year.· The inflation rate from 2018-2022 is also projectedin the following statistic. Figure 4 InflationRate in Pakistan (International Monetary Fund)Inflation in U.S: · At endof 2016, inflation in the United States is at 1.28%.
According to IMF, therewill be a 2 percent annual rise in the general level of prices until 2017. Forexample, an item bought today for about 100 U.S. dollars will cost about 102U.S. dollars next year.
Figure 5 Inflationin U.S (International Monetary Fund)Inflation in China: · Following is the average inflation rate of Chinafrom 2010 to 2015 and projected up to 2021. In 2016, the forecasted inflationrate in China was around 1.8.· China had the least inflation among the emergingcountries in 2013. But, it was still above the inflation rates of establishedindustrialized countries such as the United States or the countries in theEuropean Union. Figure 6 Inflationin China (International Monetary Fund)Inflation in India: · India’s inflation rate has been on the rise overthe last decade. However, it has been decreasing slightly since 2010.
India’seconomy, however, has been doing quite well, with its GDP increasing steadilyfor years, and its borrowings decreasing.· The budget balance in relation to GDP is notlooking too good, with the state deficit amounting to more than 9 percent ofGDP. Figure 7 Inflationin India (International Monetary Fund)Hyper-Inflation in Zimbabwe: · Because of severe political instability,Zimbabwe was the victim of hyperinflation from 2007 to 2009.
This politicalinstability caused capital flight6.Zimbabwean leadership printed more bills to solve the problem but it actuallybecame the cause of hyperinflation. Figure 8 Zimbabwe100 Trillion Bill1 The general pricelevel is a hypothetical daily measure of overall prices for some set of goods2 The value of a sum of money.3 The real value is nominal value adjusted for inflation.4 The Consumer Price Index (CPI) is a measure thatexamines the weighted average of prices of a basket of consumer goods andservices5 Afiscal year (FY) is a period that a company or government uses for accountingpurposes and preparing financial statements6When assets or money rapidly flow out of a country