inflation project

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 inflationThe annual percentage change in price level represents rate of inflation.

Rate of inflation = change in price × 100 original price = ∆P × 100 P

ExampleIf 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 MaqsoodMBA (COMSATS)Lahore, Pakistan.

E-mail: zeejaze@hotmail.comCell: 0300-4111570