Inflation

Chapter 7

Inflation
Inflation provides important insight on the state of economy and exists in any economy but with a varied rate and intensity. Stable inflation is taken as a integral component of sound macro-economic policies. With higher population growth, rapid urbanization and increase in per capita income in developing economies including Pakistan, inflation with a few exceptions was on rise over the last several years. The rising food prices have pushed up the inflation not only in Pakistan but across the region. The link between growth and inflation is well documented phenomena in the economic statistics around the world. Inflation at very high level as well as at very low level is harmful for the economy. High inflation effect more the poor than rich, while low inflation can have negative impact on growth. The policy objective of the government are to ensure high and sustained growth and keeping inflation in check. Hence, for a developing country like Pakistan, inflation needs to be stabilized in order to ensure sustain economic growth and macroeconomic stability. The government has been vigilant on inflation and has taken its policy objectives to ensure high growth while keeping inflation in check and making all efforts to reinvigorate the economy, spur growth and maintain price stability through removal of bottlenecks like energy shortages and to enhance the investment. Since 2005-06, it was observed that whenever the inflation was contained within 8 percent, there was high growth, while whenever the inflation posted value of double digit the growth remained low as shown in figure below:

Fig 7.1:Relation between Inflation and GDP Growth
20.0

15.0

10.0

5.0

0.0 FY 07 GDP Growth Inflation 5.5 7.8 FY 08 5.0 12.0 FY 09 0.4 17.0 FY 10 2.6 10.1 FY 11 3.6 13.7 FY 12 3.8 11.0 FY 13 3.7 7.4 FY 14 4.1 8.0

In FY 08, the inflation increased to 12 percent from 7.8 percent in FY 07 and this negatively affected the growth as growth decline to 5...