Inflation

Inflation Concept
Inflation is a situation where general
price increases consistently and value of
money goes on to fall.
When price level increases people’s
purchasing power decreases. Because of
this the firms have to make more
payments to the owners of resources in
the form of wages, rent and interest.
Because of this money circulation
increases, As a result prices keeps on
increasing and value of money decreases.
Definition
According to Prof Ackly Garden

“Inflation is a persistent and appreciable rise in

general level of average prices.”

Explanation
Thus from above mention definitions it is
concluded that inflation is a phenomenon where
by general price level rises consistently. If price
level suddenly jumps, this does not represent
inflation, rather inflation is a process of
continuous rise in prices.
Rate of inflation
The annual percentage change in price level
represents rate of inflation.

Rate of inflation = change in price × 100

original price

= ∆P × 100
P
Example
If price level was Rs 2 in 2006 and Rs 3 in 2007,
then inflation rate can be calculated as under,

Inflation Rate = ∆P × 100

P
= 3-2 × 100
2
= 1 × 100
2
= 50%
 Types of inflation

Hyper Inflation

Suppressed Inflation

Stagflation

Deflation
Hyper Inflation:
High rate of inflation is prevailing in the country is called
hyper inflation.

Extreme case of hyper inflation is 700 billion% in GERMANY in

1923

Suppressed Inflation:
When prices are kept below their actual prices artificially
through Government control is called suppressed inflation.
Stagflation:
When unemployment and inflation exist
simultaneously, it is called stagflation.

Deflation:
It is the opposite of inflation and indicate the
situation of persistently falling prices and fall in the
money incomes of the factor of production
Methods to calculate inflation

CPI (Consumer price index)

WPI (Whole sale price index)

SPI (Sensitive price index)

 CPI (Consumer price index)

CPI covers the retail prices of 375 items in

35 major cities

It shows the rough estimation of cost of

living in the urban areas
WPI (Whole sale price index)
WPI is used to measure the price
movement of selected items in primary
and whole sale markets.

It covers those items which are offered in

lots for sale.

It covers 106 major items.

SPI (Sensitive price index)

SPI covers prices of 53 essential items

consumed by those house holds whose
monthly income ranges from 3000 to
12000 per month
Inflation during the 1990s

Prices remained volatile during the decay

of 1990s ranging between 5.7% and 13%.

The worst inflation experienced in 1994-95

which was up to 13%.
 Inflation during 2006-07

Pakistan face very high inflationary trend

in 2006-07.

CPI based inflation in 2006-07 averaged

7.9% which shows high inflation trend in
the economy
Historical Inflationary Trends(% change)
Inflation on Monthly Basis

The monthly analysis of inflation during

2006-07 shows more clear understanding
of inflation during 2006-07

Food prices increased substantially

 Comparison with some other
countries in 2007

Inflation rate in Australia was 3.8%

Inflation rate in Bangladesh was 7.2%

Inflation rate in Pakistan was 7.9%

 Foreign Economic Aid
Economic aid is taken to invest on
productive projects
But in our country, it is invested in
unproductive projects
Because of this there is no increase in
income but expenditure increases
Which increases price level and cause
inflation
 Zeeshan Maqsood
MBA (COMSATS)
Lahore, Pakistan.
E-mail: zeejaze@hotmail.com
Cell: 0300-4111570