WHAT IS INFLATION?

Introduction:
Collective increase in the supply of money, in money incomes, or in prices
refers to inflation. Inflation is generally thought of as an undue rise in the general
level of prices. 
Definition:
“Inflation is a situation whereby there is a continuous and persistent rise in the
general price level.”
Inflation refers to a rise in prices that causes the purchasing power of a nation to fall.
Inflation is normal economic development as long as the annual percentage remains
low; once the percentage rises over a pre-determined level, it is considered an
inflation crisis.

According to Ackely:
“A persistent and appreciable rise in the general level or average of prices.”

According to Friedman:

“When central bank of country prints and circulates more money into the economy than
its demand, it will fuel demand pul inflation.

Causes of Inflation:
Demand-Pull inflation is caused by excessive consumer demand for goods and
services. This occurs when consumers have plenty of savings, higher incomes, easy
credit and low interest rates.

The high demand for goods and services produces an increase in prices as inventories
are depleted and production is increased.

Cost-Push inflation is not caused by excessive consumer demand but by rising factor
costs (land, labor, capital) for companies.

The increase in factor costs is passed to consumers by increasing the selling price of
the good or service.

These are some other factors which are causes of Inflation.

A. INCREASE IN DEMAND:
1)      Increase in Money Supply
The major cause of increase in the price level is an increase in money supply. It may
be due to increase in currency or credit money. Increase in the stock of money
induces people to demand more and more of goods and services.
2)      Increase in Velocity of Money
According to the Fisher’s Quantity Theory of Money, if there is an increase in the
velocity of circulation of money it also leads to inflation.
3)      More Investment
Investments also play an important role in producing inflation. At the moment of
investment the economy’s stock of wealth and money expands and it result is in
inflation.

B. DECREASE IN SUPPLY:
1)  Slow Agricultural Development
Low growth rate of agricultural sector caused in shortage of productivity. It results in low
supply and increase in price level.
2)  Slow Industrial Growth
Our industrial sector is not at developed form due to use of backward
techniques of production. Its less production also creates shortage in market and
caused in inflation.
3)  Increase in Wages & Salaries
Now labor is demanding more wages and salaries. Increase in wages and
salaries leads to increase in cost that increases the prices. On the other hand due to
more wages and salaries there is an increase in income and it caused in inflation.
4)  Increase in Prices of Imports
Increase in the prices of imports also leads to creation of inflation. If there is
an increase in the prices of oil and other imported raw material then it will cause to
reduction in supply.
Remedies to Control the Inflation
These are some remedies which overcome the inflation in the economy of Pakistan.
1)      Increase in the growth rate of output
2)      Government should control the supply of money through effective monetary policy
3)      Highly increasing unproductive expenditures  must be control
4)      Government should check the corruption first to eliminate the inflation
5)      Control on population  is also necessary to control inflation
6)      Reduction in budget surplus
7)      Reduction in monetary expansion
8)      Effective tax system will be helpful to control the inflation
9)      Improvement in balance of payment
10)  Developments of agricultural and industrial  sector will helps to control the inflation

Deflation

G.Thomas says that, “deflation is a reduction in the general price level due to decrease
in the economic activity of a nation”
According to Philips, “deflation is a period during which level of price decline and the
value of money rises”.
Causes of deflation
1. Access production:
The production of goods and services in excess of its demand is a cause of deflation.
The price level comes down and the producers may not able to continue their output
at present level may make wrong calculation about future demand.
2. Security sales:
The sale of security is cause of deflation. The shares and debentures are sold in the
market. The people like to invest their idle money in shares. The purchasing power is
checked to the extent of investment in shares and debentures. They can buy loss
goods due to low expending capacity. The demand for goods is laver. The supply
increases the demand limits. The excess supply bring deflation in country.
3. Low profit:
The low rate of profit is caused deflation. There may be competition in economy. The
investment in any sector may be more than the demand. The tight competition lower
the rate of profit. The seller try to clear their stick of goods. But excess supply
becomes a problem, the business persons cut their profit to retain.
4. Less demand:
The decrease in demand is cause of deflation the demand may decrease due to
decrease in income, wage. The excess supply and less demand to a sat back to the
economic activity.
Thus decreasing rate of demand is brings deflation in the economic system.
5. High bank ratio:
The high bank ratio is a cause of deflation the bank rate is an official rate of central
bank for discounting bill of commercial bank. When bank rate is raise the banks
cannot issue loans, the money supply decreases. The business working is effected
due to less funds. This high bank rate can work for deflation.
Remedies to overcome Deflation in Economy of Pakistan
The Govt. adopts the following methods to control the deflation situation:
Increase public spending
Reducing taxes
Stimulating private investment
Private consumption
increase the living standard of the people.
Stagflation
In the words of Michael swan:
“Stagflation can be described as a contraction or stagnation of a nation’s output
accompanied by rise in the price level.”
Stagflation is a more serious problem than inflation.
When the economy is hit by declining output, it depressed the economy of a whole
country with growing unemployment.
According to the Modern economists, the main cause of stagflation is the reduction in
aggregate supply.
Causes of Stagflation in Pakistan

Reduction in Labor supply

Increases in taxes
Resources costs
Remedies to control Stagflation
There are number of measures which can be adopted to slow down the rise in the
general price level and maintain the general price level.
The should make every effort that minimum wages are not raised during stagflation.
The increase in money wages should be linked with increase in productivity.
The personal and business taxes should be reduced to bring down the costs of goods.
The Govt. itself should take up development programs to create jobs in the country.