Determinants Of Recent Inflation In Pakistan

Hamid Khurshid Reg NO:sp09- s! a"-00# $$% &th !'inance"

Emails: Hamidcu88@yahoo.com

Department of Management Sciences COMSATS Institute of Information Technology,

Wah Campus

()Introduction
This research study will examine the different factors that are responsible for recent inflation in Pakistan. Inflation means continuous rise in eneral price le!el of the economy. Inflation is process in which the price index is risin and money is losin its !alue. The issue of inflation takes primary importance in Pakistan as the risin inflation has far reachin economic and social implications. "rom an economic and business perspecti!e# the inflation rate directly relates to ross domestic product# money supply# exports# prices of imports# exchan e rate# interest rate# fiscal deficit# o!ernment expenditure# tax re!enue etc. The ma$or problems faced by the society arise due to hi her inflation. %ue to hi her price le!el# the people need more money to make day to day transactions and e!ery consumer has to carry more money with them as !alue of money declines. Inflation discoura es sa!in and promotes consumption. The effect of inflation se!erity is more social than economic due to the erosion of the real !alue of money. The recent inflationary en!ironment in the country may be blamed to some extent for lower deposit rowth and lower sa!in s. Historically# Pakistan is accustomed to lower inflation and thus has less tolerance towards hi her double di it inflation. In this backdrop persistence of hi h double di it inflation for third year in a row has become intolerable and the o!ernment is pursuin combination of se!eral policy measures such as the control of the bud et deficit throu h appropriate fiscal and monetary policies# the impro!ement of a ricultural producti!ity# the fosterin of in!estment to stimulate output and the constant !i ilance on the market situation to ensure the ade&uate a!ailability of consumer oods to the common man at a reasonable price to brin inflation down to a tolerable and sustainable le!el. Inflation may also result from either increase in a re ate demand or a decrease in a re ate supply# re ate these two sources effect price le!el of an economy. 'n inflation resultin from increase in a

demand is called demand pull inflation. %emand pull inflation arises due to many factors like money supply# o!ernment expenditures# exports or ross domestic product etc. (ost push inflation may be defined as the increase in eneral price le!el resultin from increase in cost of production. The main sources of cost push inflation may be decrease in a re ate supply that may be due to cost of production# increasin wa es# hi her imports# risin taxes# bud et deficit or fiscal deficit.

howe!er inflation is an indicator of a healthy economy. )enerally# mild inflation is a natural phenomenon of any economy# no matter how stron and stable it may be. *ome economists say that small steady inflation is + reasin the wheels of commerce., -ne of positi!e effects of mild inflation in a separate economy is that it is easier to ad$ust some relati!e prices .for example salaries/. 0ene otiatin these prices downward is much more difficult. 1oreo!er# some sectors mi ht suffer immensely from constant price le!el because of so2called +sticky downward, prices that effect those sectors. *o in an attempt to ac&uire 3ero inflation# employment and profits in such sectors would drop. In addition# stable prices and 3ero inflation rate mi ht tri er deflation

. eneral decrease in prices/# which in turn would entail recession# bankruptcy# and can e!en entail depression. The time !alue of money market expression is inseparable from inflation. "rom a particular point of !iew# inflation can be understood as a !alid reason to in!est money rather than sa!e it. The !alue of accumulated wealth would radually decrease because of inflation# which explains the expression abo!e. 1oreo!er# there is a de ree of uncertainty re ardin what the actual !alue of a particular currency would be in se!eral years. 4ecause of this uncertainty# in!estin is a correct acti!ity. 5hereas moderate and mild inflation is consider as a si n of healthy economy# inflation abo!e these mild le!els is considered to ha!e a ne ati!e impact. 5hen o!ernment increases the money supply# and therefore the taxes# people are ea er to spend more money. 5ith the rowth of inflation# rate of taxes also increases# and so people are e!en more willin to spend money for two core reasons: to a!oid payin taxes on holdin currency# and to buy products before they increase in price. Therefore# in such economic conditions the demand for !arious oods is rapidly rowin # which naturally causes the rise of prices. This collection of phenomena reinforces inflation# increases the !elocity of money# and it is referred to as the !icious circle. This process is !ery difficult to harness# and in !ast ma$ority of cases it leads to hyperinflation. 's the prices o up# the !alue of money oes down# and the uncertainty increases. This increase discoura es in!estments and sa!in s# and encoura es purchasin .which is only reasin the !icious circle/. 6nfair money redistribution will occur. Those people who earn money on fixed incomes will recei!e the same amount# which is actually worth less# while the ones on a more flexible incomes will keep in pace with inflation. This way# money will be redistributed from those on fixed incomes to those on flexible incomes. The aim of the study is to analy3e the determinants of inflation and which determinant influence most in Pakistan *)Re+ie, of -iterature: -moke and -ruta .7898/ analy3e the lon term relationship between bud et deficit# money supply and inflation in :i eria usin time series data for the period 9;<8 to 788=. (o inte ration and ran er casuality test has been used. Inflation# money supply and bud et deficit are the !ariables. 0esult shows that money supply is one of the cause of inflation and a close relationship between them. The relationship between inflation and bud et deficit is bi lateral. 0esult su ests that sufficient monetary policy should be de!ised towards balance the role of money supply plays to both inflation and bud et deficit. 0amee3 et all .7898/ analy3e the relationship between inflation# exchan e rates and interest rates for the period 9;;> to 788; in 6? and Pakistan usin time series data. @ariables are the interest rate differentials# exchan e rate and inflation differentials. 0esult shows that inflation rate of 6?

and Pakistan is the positi!e relation while the ne ati!e relation between the interest and exchan e rate. 0ana and 'bid .7898/ analy3e the determinants of inflation in Pakistan o!er the period 9;<9 to 788A usin time series data. 0e ression techni&ue has been used while (PI# )%P deflator# bud et deficit and annual interest rate are considered as !ariable. 0esult shows that bud et deficit doesnBt affect inflation in the lon run.
?han et al. .788</ ha!e found the most si nificant explanatory factors for recent inflation trends in Pakistan. Time series data from 9;<7 to 788= has been used in the study. The authors ha!e employed ordinary least s&uare method to estimate results. The analysis concludes that borrowin # real demand# pri!ate sector borrowin # import prices# exchan e rate# consumer price index of Pakistan. o!ernment sector o!ernment taxes#

pre!ious year consumer price index and wheat support prices are found to ha!e direct contribution in

0amon and Cor e .7888/ analy3e the short run price le!el with respect to forei n and domestic factors in 1exico for the period 9;;A to 788D usin time series data. 0e ression techni&ue has been used. "luctuation between the price le!el# wa es and exchan e rate are considered as !ariables. They also analy3e the relationship of exchan e rate on price le!el on short run. 0esult shows that chan es in wa es and exchan e rate main cause of the beha!ior of the price le!el.
'bdullah and ?halim .788;/ ha!e explored the main determinants of food price inflation in Pakistan. "or that purpose# they ha!e used time series data for the period from 9;<7 to 7888. Cohansen co2inte ration techni&ue has been employed to estimate lon run results. The analysis illustrates that money supplyE per capita )%P# a riculture support price# food exports and food imports are direct associated with food inflation in Pakistan.

%ie o et all .7888/ identify the causes of inflation in E&uador @'0 model has been used. Inflation rate# international prices# exchan e rate# public policy !ariables# transportation cost# weather and political e!ents are considered as !ariables. 0esult shows that main reasons of inflation are international prices# exchan e rates and public policy.
?han and )ill .7898/ ha!e focused on the determinants of inflation in Pakistan usin different price indicators i.e. (PI# 5PI# *PI and )%P %eflator. They ha!e adopted time series data from 9;<9 to 788= for the analysis. -rdinary least s&uare method has been employed for the estimation of !alues of coefficients. The explanatory !ariables that are bud et deficit# exchan e rate# wheat support price# Imports# *upport price of su arcane and cotton and money supply are found to be directly affectin all the price indicators while interest rate is indirectly related to all the explained !ariables in Pakistan.

1ehdi et all .788</ analy3e the inflation2 tar etin the exchan e rate policy for an oil producin country .Iran/ o!er the period 9;<8 to 788= usin time series data. '0%F co inte ration

techni&ue has been used. 1oney supply# exchan e rate and oil re!enue are considered as !ariables. 0esults show that exchan e rate will lead to increase the inflation. 0esults also shows that oil re!enue will increase inflation in short term while decrease in lon term. *alam et all .788A/ forecastin inflation in de!elopin nation .Pakistan/ usin time series data for the period 9;;D to 788>.. The core focus in this research is to forecast the monthly inflation on short term basis. (onsumer price index is the !ariable. -n the basis of !arious dia nostic# selection and e!aluation criteria the best and accurate model is selected for the short term forecastin of inflation.
-latun$i et al. .7898/ ha!e examined the recent factors which are affectin inflation in :i eria. Time series data has been selected for this particular study. In this paper they ha!e applied Cohansen techni&ue to formulate the results. The study re!eals that the pre!ious year total imports# pre!ious year consumer price index for food# pre!ious year o!ernment expenditure# and pre!ious year exchan e rate ha!e ne ati!e influence on inflation rate. -n the other side# pre!ious year exports# pre!ious year a ricultural output# pre!ious year interest rate and crude oil exports ha!e ne ati!e impact on the rate of inflation in :i eria.

.) /ethodolog0 and Data

.)( 1heoretical 'rame,ork: