QS) DISCUSS INFLATION (HYPER & GALLOPING) .

ITS REASONS AND REMEDIAL

MEASURES TAKEN BY THE GOVERNMENT TO OVERCOME THEM?
ANS) True inflation begins when the elasticity of supply of output in response to increase in
money supply has fallen to zero or when output is unresponsive to changes in money supply.
When there exists a state of full employment, the conditions will be clearly inflationary, if there
is increase in supply of money. But we dont subscribe to the classical view that when there is
full employment we can say that when money supply increases it results partly in the increase
of output (GNP) and it partly feeds the rise in prices and when the supply of output lags far
behind, the rise in prices is described as inflationary.
An increase in the general price level of goods & services; alternatively, a decrease in
purchasing price of the dollar.

TYPES OF INFLATION:
When either the price of goods or services , or the supply of money rises; this is considered as
inflation. Depending on the characteristics and the intensity of inflation, there are several
types, namely:

Creeping Inflation
Trotting Inflation
Galloping Inflation
Hyper Inflation

CREEPING INFLATION
When there is a general rise in prices in very low rates, which is usually between 2-4 percent
annually, this is known as creeping inflation.
TROTTING INFLATION
Trotting inflation occurs when the percentage has risen from 5 to 9 percent. At this level it is a
warning signal for most Governments to take measures to avoid exceeding double digit figures.
GALLOPING INFLATION:
Another type of inflation is the galloping inflation, where the rate of inflation is increasing at a
noticeable speed and at a remarkable rate, usually from 10% to 20%

HYPER INFLATION:
When the inflation rate rises to over 20% it is generally considered as hyper inflation and at this
stage it is almost uncontrollable because it increases more rapidly in such a little time frame.
A hyperinflation is mainly caused when there is excessive, drastic growth in the supply of paper
money. As the destruction of currency reaches its peak, hyperinflation happens. In Pakistan,
monetary and fiscal authorities are regularly issuing large quantities of money to pay for a large
stream of Government expenditures thus money in circulation is now much higher than the
level of total output of the economy. It has resulted in rapid fall of the purchasing power of our
currency and the rise of prices of commodities, and its impact on the daily life of common
people has been overwhelming.

INFLATION TRENDS IN PAKISTAN:

Inflation in Pakistan over the last 18 years had been fluctuating between 3.10% and 13%. This
was mainly due to:
1)
2)
3)
4)
5)
6)

Decelerating economic growth

Loose monetary policies
Output set-backs
Higher duties & taxes
A depreciating Pak Rupee
Frequent adjustments in the administered prices of gas, electricity, POL products as well
as the support price of wheat.
7) Political instability
Both the food and non food inflation contributed to the persistence of double digit inflation
during the period from 1990 to 1997, averaging 12.2 and 10.7%, respectively against the overall
CPI inflation of 11.4%
The pressure on prices intensified in 1994-95 when inflation went up to 13%, mainly due to
extremely high food inflation of 16.5%. The price pressure started to moderate from 1997-98
onwards as an improved supply position, strict budgetary measures and depressed
international market prices kept domestic prices in check.
The inflation rate which was at 5.7% in 1998-99, was further reduced to 3.1% by 2002-03.This
low level of inflation was supposed by strict fiscal discipline, the lower monetization of the
budget deficit, an output recovery, a reduction in duties & taxes, and appreciation of exchange
rate. During this time period, the country had very low level of food inflation.

Inflation began to pick up after the first quarter of 2003-04,reaching as high as 9.30% in June
2005. The inflation rate had come down to 7.80% at the end of 2006-07 but has since steadily
risen to 10.30% over the period July-April 2007-08. Despite these measures taken by the
Government over the last couple of years, inflation has steadily increased this past fiscal year
due to soaring international food and energy prices.

CAUSES/ REASONS OF INFLATION:

There are a few different reasons that can account for the inflation in our goods & services.
Lets review a few of them.
DEMAND-PULL INFLATION
Demand pull inflation is a result of strong consumer demand. When many individuals are trying
to purchase the same good, the price will inevitably increase. When this happens across the
entire economy for all goods, it is known as demand-pull inflation.
COST-PUSH INFLATION
Cost push inflation is a type of inflation caused by substantial increase in the cost of important
goods & services where no suitable alternative is available. A phenomenon in which the general
price level rise due to increase in the cost of wages and raw material.
MONEY SUPPLY
It plays a large role in inflationary pressure as well. Monetarist economists believe that if the
Federal Reserve does not control the money supply adequately, it may actually grow at a rate
faster than that of the potential output in the economy, or real GDP. The belief is that this will
drive up prices and hence, inflation. Low interest rates correspond with a high level of money
supply & allow for more investment in big business and new ideas which eventually leads to
unsustainable levels of inflation as cheap money is available. The credit crisis of 2007 is a very
good example of this at work.
Inflation can artificially be created through a circular increase in wage earners demand and
then the subsequent increase in producer costs which will drive up the prices of their goods and
services. This will then translate back into higher prices for the wage earners or consumers. As
demands go higher from each side, inflation will continue to rise.

GOVERNMENT AND SBP MEASURES:

New democratic Government has entered FY14 with heavy overhang of the last years
macroeconomic imbalances in the economy. At the same time, it carries the responsibility of
fulfilling the aspirations & promises to the nation. The trade offs are not easy and global
economic environment continues to be fraught with uncertainties though some trends are
quite clear: global growth has slowed down, international liquidity squeeze persists & Pakistan
sovereign rating prevents tapping international markets, and international commodity prices
remain high.
Both the Government & Central Bank have taken a set of fiscal and monetary policy measures
over the term of FY13 to curb macroeconomic imbalances. While other countries have greater
room to support growth at the cost of higher inflation, the trade off for Pakistan would not be
affordable since inflation is already very high while growth is still at a respectable level. The
Government has taken various steps to release demand pressures on the one hand and
enhance supplies of essential commodities on the other.
The Government has its policy objective to ensure high growth while keeping inflation in check.
Growth creates more jobs & increases income, directly contributing in reducing poverty.