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Effects of Inflation on Standard of Living (A case study of Multan, Pakistan)

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Universal Journal of Management and Social Sciences Vol. 2, No.12; December 2012

Effects of Inflation on Standard of Living (A case study of Multan, Pakistan)

*Shahzad Farid1, Waqas Ali Khan1, & Imtiaz Ahmed Warriach2
1
M.Phil Scholar of Sociology, Bahauddin Zakariya University, Multan, Pakistan.2Assistant professor in
Sociology Department, Bahauddin Zakariya University, Multan, Pakistan.
*Farid420@rocketmail.com
Abstract
Inflation is simply rise in prices of commodities and devalues of money. It directly influences the
standard of living. This paper dealt with the effects of inflation on standard of living in terms of
expenses on food and non-food items, income, saving, loan and recreation. A sample of 200 male
heads of families was taken from 2 towns out of 6 towns of Multan, Pakistan; using multistage
sampling. Interview schedule was used as a tool for data collection. It was inferred from analysis of
data that inflation did highly affect the middle class. People are compelled to get loan and to do over
work, to fulfill their family expenditures due to the inflation. It was also concluded that standard of
living of middle class people is decreased in 2011 as compared to 2010 due to the inflation because
their expenses boomed up but there was minor increased in their income . Inflationary effects, at
family level, can reduce, never eliminate, through keeping money circulation and abating saving
during persistently intensifying inflation and renouncing to pay interest over money and goods, and
income ought to be increased with the same ratio of rise in inflation.
Key words: inflation, standard of living

1. Introduction
Inflation is an inevitable property of any economy in the world. It influences every country,
negatively as well as positively, whether it is developed or developing country as well. Zou, et. al.
(2011) stated that inflation is an important factor leading to social and economic instability and
disorder. It is one of the most largely observed and tested economic variables both theoretically and
empirically. Its causes, impacts on other economic variables, and cost to the overall economy are
well known and understood (Rizvi and Naqvi, 2010). Pakistan, being a developing country, could not
overcome the continuously year to year climbing up inflation, and also its causes and consequences.
After remaining relatively low for quite a long time, the inflation rate in Pakistan started to
accelerate in late 2003 (Mohsin and Schimmelpfennig, 2006). The role of money supply appears
significant in influencing food price inflation in Pakistan (Ashfaque and Qasim, 1996).which disturbed
family budget as well as consumer’s purchasing power. People struggled in order to maintain their
living standard but it slumped down gradually. In Pakistan, during the first four years of the new
millennium, inflation remained under 5 percent and then jumped to 9.3 percent in 2004-05. It
settled at 8 percent during 2005-06. The growth in wheat prices and strength of the exchange rate
remained mixed. However, it seems that excessive money flows towards the public and private
sector, along with the import price hike in 2003-04 and 2005-06, as well as the rise in price of wheat
in 2003-04 and 2004- 05 pulled inflationary pressure at an alarming level (Farooq, H. Mian et al.,
2008). Economic survey of Pakistan 2009-11 found that inflation rate stood at 14.1 percent during
(July-April) of the current fiscal year 2010-11, as against 11.5 percent in the comparable period of
last year, whereas, PIDE Inflation Expectations Survey for March 2011, expecting 15.5 percent
inflation for April 2011 and 16.4 percent for May 2011.Results also indicate that expected inflation
will remain about 17.0 percent for the next six months and 16.6 percent for the current year.

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Universal Journal of Management and Social Sciences Vol. 2, No.12; December 2012

As far as Pakistan concerns regarding inflationary effects it has been experienced worst
consequences reflected by poverty, food crises, price hike etc. Mahmood, Hafeez and Rasheed
(2009) concluded that inflation causes poverty. Day to day increase in prices of commodities
especially of non-food items like oil and gas snatch money from savings of consumers and
uncertainty of prices, both food and non-food items, generate enthusiasm among people toward
earn more and more therefore, people prefer to work over recreation underestimating their health.
Over work and lack of recreation make them vulnerable particularly of middle class people and they
almost fall into lower class. Although, over time work bless money but it causes exertion and
lethargic body that charge more expense on health instead upper class people hardly encounter any
problem to inflation.
Ismail, A., et.al. (2010) found that the inflation brings negative impact while exports and investment
brings positive impact on Pakistan economy and suggested that we should encourage a larger scale
of export promotion activities to enhance the economic growth. It will create numerous job
opportunities which increase the per-capita earnings and standard of living.
2. Purpose of the study
Many researches have been conducted on this issue but the researcher selected this unique topic
because it draws a relationship between inflation and standard of living. Rising inflation is shedding
down living standard. In Pakistan this is the most flaring issue and it is also the determinant of
decreasing the rank of Pakistan in HDI.
Before 2007, the inflation was not drastically increased but after 2007 there was an uncontrollable
boom held in inflation. The necessities particularly food items became inaccessible especially for
labor. During 2007 to 2008, the prices of goods consecutively grew but the price of services did not
rise with the same ratio. Therefore, the fluctuation in the prices of goods and services has left
several adverses on individuals’ life. Such kind of fluctuations is one of them which brought many
problems and enervating standard of living. Thus, the core objective of this study is to explore the
effects of inflation on standard of living. To measure the standard of living, main objective is
classified into some sub-objectives like measuring the saving, loan possibility, income, recreation,
expenses etc. The main research questions are as follow:
I. What are the effects of inflation on family income?
II. What are the effects of inflation on monthly household expenditures of families?
III. What are the effects of inflation on recreational activities?
IV. Which class (upper, middle and lower) is comparatively more affected to inflation?
3. Methodology
Pakistan is the patriarchal country; therefore, only male heads of the families were taken as
respondents because they own family economy. Multan city was selected as universe. Two towns:
Shah-Rukne-Alam Town and Bosan Town were selected, using multistage sampling techniques, out
of six towns of Multan. A sample of 200 respondents was taken, representing as 127 (63.5%) male
heads of families from lower class, 53 (26.5%) from middle class and 20 (10%) from upper class.
Semi-Structured questionnaire was used to interview the respondents and SPSS for analysis of
collected data. Formulated hypothesis was tested through Paired t-test. The paired t-test is useful
for analyzing differences between twins, differences in pre and post measurements on the same
subject, and differences between two treatments given to the same subject

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Universal Journal of Management and Social Sciences Vol. 2, No.12; December 2012

4. Discussion
Although, inflation deteriorates living standard but not for all, yet, it blesses too, e.g. debtors, and is
a contributing factor of motivation to earn more and more to cope with the phenomenon. In
Pakistan, inflation particularly food inflation reducing the economic capabilities of people and they
are rapidly falling into the ditch of poverty. Chani, I. Muhammad et. al. (2011) argued that the
inflation and trade openness have caused an increase in poverty in Pakistan. With the passage of
time increasing inflation became one of the major influential problems of Pakistan. In such days of
inflation the poor thinks it better to die than to live in such schizophrenic situation emerged among
regular people. Multan, being a city of Pakistan, is not exceptional. Table.1 revealed the fluctuation
of food and non-food items’ expenditures in 2010 and 2011.
Upper class did not affect by inflation in term of household expenditures on food items (i.e. wheat,
rice, milk, mutton, beef, chicken, fish, vegetables etc) and non-food items (i.e. car, motorcycle,
mobile, electricity, fuel, gas etc) in both years (2010-11) because people belong to this class earned
more than enough and spending on 5% of their income on food and non-food items and saving
decreased only 0.5% in 2011, therefore, upper class people hardly encountered any obstacle for
their living standard to disturb. While its recreation became 32% less in 2011 as compared to 2010
because upper class people invest a lot of time for sourcing income.
Both middle and lower class household expenditures were more than their income in 2010-11 and to
fulfill household expenditures they were getting loan and were doing over work respectively.
Incomes of both classes increased 2% but middle class loan rose 21.3% and recreation slumped
down 29% in 2011 comparing with 2010 which reflects that middle class people almost fell into the
realm of the lower class, whereas, lower class loan rose only 3.2% and recreation dipped down only
7% in 2011 as compare to 2011. Although lower class was already being affected but “living standard
of middle class is lowing down as much as people, belong to middle class, have to live as lower class
people”, therefore, middle class is much affected to inflation as compare to other classes.
Specifically, middle class living standard slumped down in 2011because of increasing household
expenditures and negative real income.
Table No. 1 Distribution of classes regarding family income, household expenditures (food and non-
food items), loan, saving and recreation (hours) in 2010 and 2011

Variations in the selected determinants of living standard

Non-
years Classes Family Food Recreation
food Loan Saving
income items (hours/month)
items
21388800 456066 593160 20339574 1146
Upper -
1069440* 22803.3 29658 1016978.7 57.3
1209937 698911 882837 371811 6837
2010 Middle -
22829 13187 16657.3 7015.3 129
675805.1 376936 454787 155956 - 14224
Lower
5321.3 2968 3581 1228 112
21314968 507222 651224 20156540 588
Upper -
1065748.4 25361.1 32561.2 1007827 29.4
1232425 812024 993549 573148 3763
Middle -
2011 23253.3 15321.2 18746.2 10814.1 71
700913 407213 459613 165913 12471.4
lower -
5519 3206.4 3619 1306.4 98.2 3
Universal Journal of Management and Social Sciences Vol. 2, No.12; December 2012

*Italic values represent the average per family variables e.g. family income etc

Such kind of deficit, at household level, in middle class people undermined their power of
consumption and made them vulnerable. To survive, they have to get, at least, their basic necessities
which have beyond their purchasing capacity, therefore, they directed themselves toward loan
which is over burden on their family economy because they have to pay back the loan, with interest,
under stress of climbing up inflation. Bach (1974) claimed that Inflation transfers real purchasing
power from creditors to debtors, unless the inflation is anticipated and taken into account in setting
the terms of the loan. Fix income earners, especially, belongs to middle and lower class, crush in
such circumstances. Jabbar, A. Khan et. al. (2011) found that Inflation impact on various types of
human beings like lender and borrower, fixed payment receiver, salaried group, stakeholders,
entrepreneurs and harvesters. Owing to the minor or static income, inflation imbalanced their
economic condition because the value of money decreases and prices tend to increase
consecutively. Poensgen and Straub (1976) found that with fixed assets inflation causes losses and
Scheve (2004) claimed that those individuals who own nominal assets and receive fixed incomes are
likely to be more inflation-averse, while those who are debtors and pay fixed incomes are likely to be
less so. Due to the enervating value of money people purchasing power effects but while they are
suffering in the problems they lumber to fulfill their whimsical desires like managing household
expenditures. Instead of getting loan, to regulate themselves in dogging inflation mostly lower class
people adopt another way: over time work; which is a sign to dip down recreational activities. In
nutshell, inflation decreases standard of living through molding real income into loan and hard
working into lack of recreational activities as well as lack of better social and physical health.
5. Hypothesis Testing
As it has been revealed in the previous analysis of classes that middle class is affected more than
other classes, therefore, a hypothesis inferred to test as follow:
Hypothesis: Middle class is more affected from inflation in 2011 as compared to 2010 in term of
household expenditures.
Table No. 2
Samples N Mean S.D SE Mean
Expenditures 2011 53 26882 11557 1588
Expenditures 2010 53 22331 9826 1350
Difference 53 4551 7835 1076
The above mentioned table depicts the result of middle class comparative expenditures in 2011 and
2010. The P-Value in result indicates that middle class is highly affected from inflation in 2011 as
compared to 2010. World economically stratified as three classes: lower, upper and middle class.
Each class has its own particular economical condition. The Upper class has access to a lot of
material entities, therefore, they seem vivacious whereas the middle class is confined to purchase
goods due to their mediocre economical condition and the lower class even, hardly, get access to
the subsistence.
The excess of money into the market is one of the major causes of inflation. Bashir, F., et. al. (2011)
claimed that the long run money supply, gross domestic product, government expenditures and
imports are contributed in raising consumer price index. Rapid increases in world oil and commodity
prices, wheat shortages, mounting fiscal deficits and increased bank borrowing are considered the
main reasons for inflation in the economy (Saleem, 2008). But the excessive money is blessing for

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Universal Journal of Management and Social Sciences Vol. 2, No.12; December 2012

the industrialists or factory owners (whose business rely on debt). The employees’ family budget
distorts having very slow growth of income. Anyanwu, C. J. (1992) argued that inflation deteriorated
the fixed income earners and income redistribution is in the favor of businessmen and shareholders.
When money devalues, simultaneously value of income also decreases and prices of commodities
unpredictably jumped upward while salaries or wages remains constant of employees. In such
scenario, middle class people are drastically effects because their incomes remain static or grow
slowly. North, G. (1980) claimed that middle class affects during inflation in term of their budget.
Being static income earners, price hike disturb their economical stability.
When the price of goods increase the expenses on good also increase which ultimately leads toward
enhancement of family expenditures on goods but the wages and salaries enhanced very slowly as
compare to the prices of commodities. Ezirim, et.al. (2008) explored that there is significance
relationship between public expenditures growth and inflation. Such inequality of growth produces
imbalance in income and expenses therefore, it affects strictly middle class as compare to the upper
class and lower class as well.
6. Conclusion
Through the analysis of empirical data and hypothesis testing it is inferred that middle class got
sharp affects from inflation in 2011 as compare to 2010, in term of increased household
expenditures. Possessing less (comparing with the required necessities expenses) or fix income,
people belong to middle class, effort to earn more to regulate themselves within increasing inflation
phenomenon which ultimately led them toward loan which brings over economical burden on their
family. Climbing up inflation, household expenditures and getting loan undermine the living standard
of middle class.
Upper class do not affect from inflation because of its possession of excessive money. Lower class
people try to adjust themselves into increasing inflation rate through hard working and loan which,
simultaneously, influenced their social and physical health brutally that invites more expenses on
health and instead of solution, over work become cause of more expenses.
7. Recommendations
I. No deficit financing especially in the developing countries because in developing countries
this type of financing is used in non-developmental expenditures which do not create
employment in return it will not enhance family income, therefore, families are compelled
to get loan.
II. Tax structure should be of direct taxation system so that upper class should pay more than
the middle and lower class.
III. Prompt and direct intervention of government on prices of food items resultantly providing
safe guard to middle as well as lower class.
IV. Minimum wage level should correspond to the expected inflation rate which would facilitate
to maintain living standard of each class.

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