Inflation is a situation where there is a sustained and abnormal increase in the general price level.
The main causes of inflation are:
1) Demand pull inflation,caused by an increase in aggregate demand in this case,demand for all products rise,causing the demand curve to shift upwards,hence increasing the general price level.
2)the second cause is costpush inflation,that is,a rise in cost of production,such as,raw materials,causes prices to rise. Since cost of production have risen,producers pass this burden on consumers,by charging higher prices.
3)another cause is imported inflation. This is when a country is importing materials from another country,in which inflation is high in that country.
4) finally,according to monetarists,inflation is caused when the money supply in an economy increases. It is a situation of too much money chasing too few goods,hence increasing the price of goods.
1. High monetary expansion: The supply of money is expanding quickly every year but the supply of goods and services is not increasing according to that rates. Due to this, prices are rising.
2. Increase in wages: The rise in wages, pensions and salaries have increased the purchasing power of the people. Wages and prices chase each other.
3. Increase in population: The rate of population growth in Pakistan is more than 3%. Due to this, aggregate demand is increasing day by day.
4. Deficit financing: Means printing of currency notes by the Governmen
t. in order to cover the defect in the budged. It will create inflationary pressure.
5. Hoarding: Businessmen hoard necessities of life for earning profits. So increase in hording, profiteering, increases the prices of the commodities.
6. Foreign Remittances: The increased remittances by the people working outside the country, purchasing power of their families are increased day by day. So the demand is increased.
7. Natural Calamities: Due to floods, excessive rains and earthquakes the level of production is decreased increase in demand and hence, the prices of goods is increase.
8. Consumption habits: The people in Pakistan are extravagant. The people want to achieve high standard of living. So there is a demonstration effect in Pakistan. As a result, the rise in prices of goods and services continues.
9. Devaluation: Devaluation brings inflation due to rise are the prices of imports. The people know that after devaluation prices will rise and they begin to hold stocks. Price level goes up due to increase in the general demand.
Following are some of the causes of inflation:
- an increase in demand due to increase in government and private spending.
- decrease in supply due to increase in input prices.
- increase in wages of workers resulting in higher prices by the employers.
- increase in quantity of money circulation.
Following measures can take part in reduction of inflation.
- Setting higher interest rates and slowing money supply by the central banks can control inflation.
- Reducing demand, by taxation through fiscal policy
- fixation of exchange rates.
-reducing government spending by using monetary policy.
Increase in disposable income cause inflation how
There are many causes of inflation in the economy. First of all is the demand for non-development expenditures. The elected and not elected governments in Pakistan since 1947 have not been able curbs the non-development expenditures. The lavish expenditures by the elected representatives and the government functionaries have contributed to the inflationary rise in general prices. The rapid monetary expansion over the years is an important sector of creating inflationary pressure in the economy. For instance the monetary expansion was 14.2 percent during the year 1997-1998. However the State Bank of Pakistan has managed to bring down the monetary expansion from 14.2 percent to 9.5 percent in the year 2001-2002.
The incurring deficit financing has also come down to 4.7 percent in 2000-02. The foreign remittances by the Pakistan working abroad increased from 48.7 million dollars in 1971 to 1848 million dollars in 1990-1991. it has now come down to 984 million dollar in 1999-2000. The decline in workers remittances is mainly due to higher rate of premium that prevails in the open market. The main cause of decline is that workers are sending their remittances through non-banking channel. The foreign remittances are no doubt a boon to the country but these have also enhanced the bank deposits.
Current causes of inflation
Demand pull inflationcostpushmonetaryremidies
fiscal policymonetary policygoverment cut on its expencesphilips curve