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CONTENTS
ABSTRACT 2
INFLATION 3
Introduction 3
Types of Inflation 3
Demand-pull 3
Cost-push inflation 4
Pricing power inflation 4
Sectorial inflation 4
Built-in inflation 4
Causes of Inflation 4
Excess money printing 4
High Production Cost 4
International lending and national debts 4
Federal taxes 5
Effects of Inflation 5
Negative Effects 5
Positive Effects 6
How to Survive Inflation? 6

LITERATURE REVIEW 8
Inflation Impact on Economy By
Rafia Ehsan
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Inflation and erosion of quality in Pakistan By
Dr Humayun Dar
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FINDINGS AND ANALYSIS 10
Inflationary Factors in Pakistan 10
Supply-side shocks 10
Increased domestic demand 10
Increase in net imports 10
Rising trade deficit 10
Fiscal policy remained expansionary 10
Expansionary monetary policy 11
Rising import prices 11
Indirect taxes 11
Price Indices in Pakistan 11
Flaws in Measuring Inflation in Pakistan 11
Graphical Analysis of Inflation from 2008 to 2012 Using CPI 12
CONCLUSION 14
RECOMMENDATIONS 14

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ABSTRACT
Pakistan has undergone a significant economic growth during last few years, but
the core problems of the economy are still unsolved. Inflation remains the biggest
of all these problems. The aim of thisreport is to find the determinants of inflation
in Pakistan, its causes and measures to control it.In this report the literature review
explains the view point of Rafia Ehsan and Dr. Humayun Dar who isan economist
and PhD from Cambridge University in determining the causes of inflation and
establishinglinks of different variables with inflation such as fiscal and monetary
policies, unemployment, demandpull and cost pull factors that affect inflation.The
report highlights patterns in Pakistan from 2008 to 2012, which reports the last five
years as highlyinflationary due to expansionary monetary policy and high oil
prices. High international oil prices lead toincrease in transportation charges as
well as energy intensive industry products such as metalcommodities. As producers
pass on the increased costs to consumers, this leads to an increase in cost
of Pakistani imports, which drives up inflation. The high levels of inflation reflect
a volatile economy inwhich money does not hold its value for long. Workers
require higher wages to cover rising costs, andare disinclined to save. Producers in
turn may raise their selling prices to cover these increases, scaleback production to
check their costs (resulting in lay-offs), or fail to invest in future production.
Manysuch problems have been, and still are, being faced by Pakistan. The factors
leading to high levels of inflation include deficit financing, foreign remittances,
foreign economic assistance, increase in wages,population explosion, black money,
prices of imported goods, devaluation of rupee, etc. Governmentactions are not
useful, as we are not seeing any difference in the inflation rates.
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Domestic production should be encouraged instead of imports; investment should
be given preferencein consumer goods instead of luxuries, Agriculture sector
should be given subsidies, foreign investmentshould be attracted, and developed
countries should be requested for financial and managerialassistance. And lastly a
strong monitoring system should be established on different levels in order tohave
a sound evaluation of the process at every stage

INFLATION
INTRODUCTION
Inflation refers to a rise in prices that causes the purchasing power of a nation to
fall. Inflation is anormal economic development as long as the annual percentage
remains low; once the percentage risesover a pre-determined level, it is considered
an inflation crisis.The term "inflation" once referred to increases in the money
supply (monetary inflation); however,economic debates about the relationship
between money supply and price levels have led to its primaryuse today in
describing price inflation. Inflation can also be described as a decline in the real
value of money

a loss of purchasing power in the medium of exchange which is also the monetary
unit of account. When the general price level rises, each unit of currency buys
fewer goods and services. A chief measure of general price-level inflation is the
general inflation rate, which is the percentage change in ageneral price index,
normally the Consumer Price Index, over time. Inflation can cause adverse
effectson the economy. For example, uncertainty about future inflation may
discourage investment and saving.High inflation may lead to shortages of goods if
consumers begin hoarding out of concern that prices willincrease in the
future.Economists generally agree that high rates of inflation and hyperinflation are
caused by an excessivegrowth of the money supply. Views on which factors
determine low to moderate rates of inflation aremore varied. Low or moderate
inflation may be attributed to fluctuations in real demand for goods andservices, or
changes in available supplies such as during scarcities, as well as to growth in the
moneysupply. However, the consensus view is that a long sustained period of
inflation is caused by moneysupply growing faster than the rate of economic
growth. Today, most economists favor a low steadyrate of inflation.Low (as
opposed to zero or negative) inflation may reduce the severity of economic
recessions byenabling the labor market to adjust more quickly in a downturn, and
reducing the risk that a liquiditytrap prevents monetary policy from stabilizing the
economy. The task of keeping the rate of inflation lowand stable is usually given to
monetary authorities. Generally, these monetary authorities are thecentral banks
that control the size of the money supply through the setting of interest rates,
throughopen market operations, and through the setting of banking reserve
requirements

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