Inflation in Pakistan essay

What is Inflation:

In economics, inflation is the increase in general prices of goods and services. Inflation in Pakistan has raised up to an alarming level in recent times. Inflation reduces the buying power of the currency because, as the prices of goods and services increase, people will have to spend more money to buy them. Eventually, it reduces the value of the currency as well as the buying power of people. Inflation is measured by the amount of rise in prices of goods and services yearly and is called inflation rate. From 1960 to 2022, the average inflation rate in Pakistan was 8.4% per year. But from May 2022 to May 2023 the inflation rate jumped to 37.97%.

Types of Inflation:

There are three main types of inflation that an economy can face:

• Demand-pull inflation.
• Cost-push inflation.
• Built-in inflation

Deman-pull Inflation:

Demand-pull inflation is a type inflation in which the prices of services and goods increase due to the increase in demand of those goods and services. When people start increasing the demand of a product or service more than a certain level, its supplier start rising its price and the increase in price does not affect its demand because when people are desperate for a product or service, they easily get ready to pay more money for it. This process causes demand-pull inflation.

Example of Demand-pull Inflation:

In Ramadan, the demand of fruits increases as everyone wants to buy fruits for Iftaar. Now, as demand increases, the prices of fruits also increase to an abnormal level but people still buy fruits. This is a perfect example of demand-pull inflation.

Cost-push Inflation:

Cost-push inflation is a type of inflation in which manufacturing cost of a product increases and as a result the price of that product also increases. Now, the question is why manufacturing cost increases? The answer is very simple, cost-push inflation comes in when an economy is already facing demand-pull inflation. Due to demand-pull inflation, the prices of raw materials (required for a product) increases, as a result the price of the final product also increases. The businesses, who manufacture those products, lose their profit if they do not increase the prices of those products.

Example of Cost-push Inflation:

If the prices of chicken and rice start increasing continuously, eventually all the restaurants will have to charge more for chicken-pulao.

Built-in Inflation:

When demand-pull inflation and cost-push inflation occurs, it becomes difficult for salary persons to survive on same salary(they were getting before inflation). They start demanding a rise in their salaries from their employers. Now, if the employers do not increase their salaries, they will lose most of those employees, ending up with a labour shortage. And if the employers increase the salaries, as a result their cost of production also increases. Eventually, businesses will have to increase the prices of their products if they do not want to compromise on their profit levels. This is a situation of built-in inflation.

Which type of Inflation Pakistan is facing:

Right now, Pakistan is facing both demand-pull and cost-push inflation. The prices of commonly used goods and services are continuously going up and the most dangerous thing is, these commodities are not always available in the market as the market faces shortage even on significantly high prices. Even if people are ready to pay more money, they do not always get their desired product. Government of Pakistan should take necessary steps to control or tackle inflation within the state.

How to Tackle Inflation:

Inflation is perhaps the biggest challenge for an economy and its growth. It is also the most clear hurdle in the way of development of a state. So, it is very important to sensibly tackle inflation. Government of Pakistan can do multiple reforms to tackle inflation within the state, some of them can be, reducing the budget deficit, encouraging domestic production instead of imports, facilitating agriculture sector, attracting foreign investments, tourism should be promoted. Education system should be improved, technology is the future and if we want to secure our future, we have realize the importance of technical education. Government should promote technical education by different initiatives throughout the country to help our youth acquire quality technical education. The government needs to take a lot steps on state level and on lower levels as well but the most important is to set up a strong monitoring system to keep an eye on each and every aspect of the whole process. It will also help to improve the performance in every sector.