The issue of price stability is critical for any economy. Everyone in society is affected by inflation. Macroeconomic policies are primarily concerned with achieving optimal and stable economic growth while maintaining low inflation. In April 2021, the current CPI inflation rate in Pakistan was 11.0 percent year on year. Inflation has a negative impact on the economy’s overall growth. The impact of the money supply, GDP, oil prices and exchange rate on the rate of inflation in Pakistan where detection of financial market bubbles is critical because they have a long-term influence on every area of the economy, resulting in significant losses.
In Pakistan, price levels have fluctuated dramatically, harmed economic efficiency and inflation rates are typically high. As a result, it is critical to recognize inflation bubbles to determine whether the increase in inflation is due to demand or to prevalent pricing exuberant behavior that results in a sudden increase in inflation. In Pakistan’s economy, a negative and strong inflation growth link has been discovered representing persistent inflation that have negative impact on the economy’s GDP growth.
Economists and policymakers are frequently interested in the patterns and correlations of the inflation rate, interest rate, literacy rate, and unemployment rate, which can aid in analyzing a country’s economic growth. Inflation occurs when the supply of money exceeds the demand for it, or when the prices of goods rise steadily. Inflation frequently has negative effects for people’s purchasing power, macroeconomic instabilities, and overvalued currency rates, all of which have a detrimental impact on exports.
When making price-setting decisions or negotiating for salaries, the degree of inflation has a vital effect. Variations in the availability of products and services used as inputs in manufacturing have an impact on the final price of goods and services in the economy, resulting in price changes.
The basic goal is to achieve high and sustained economic growth with low inflation. As a result, for many years, inflation has been one of the most studied problems in macroeconomics due to its substantial implications for growth and income inequality. The factors that determine inflation rates have long been a hot topic of discussion around the world. Demand-pull inflation is caused by an increase in aggregate demand, whereas supply shocks are expected to create ‘cost-push inflation.’
The production gap is anticipated to have a high positive association with this. The link between inflation and growth, on the other hand, is dependent on the status of the economy. If the economy’s potential output grows fast enough, high growth can be achieved without an increase in inflation. If demand continues to rise at this rate and productive capacity does not expand, there is a risk of a significant rise in general prices without any extra growth in output in the long run. This period of growing inflation could have serious economic effects.
Inflationary pressures are always linked to increasing price volatility, which might raise concerns about the future profitability of investment projects. As a result, more cautious investment decisions are made than would otherwise be the case.
It will, in the end, result in fewer investment and economic growth. Inflation can also affect a country’s balance of payments by making exports more expensive. Furthermore, inflation can interact with the tax system, causing borrowing and lending decisions to be disrupted. Because of its intensity, inflation is always a contentious topic. It’s crucial to investigate the factors that influence inflation. When the potential output and actual output turn out to be equal and the economy is operating at full employment, there is no additional capacity.
Any extra boost in growth at this point comes at the cost of higher inflation. In the long run, without any additional output growth in the economy, there is also a risk of rapid increases in general prices, which could have serious consequences for the economy. Uncertainty about future investment profitability and a rise in price 346 fluctuation are always linked to high inflation. This circumstance may dissuade investors from making investment decisions, resulting in lesser investment and economic growth.
Inflation can also affect the economy’s balance of payments by making exports more expensive. Furthermore, the tax system can interact with inflation, and inflation can affect lending and borrowing decisions.
Yearly change of Pakistan’s inflation rate
The annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or altered at set intervals, such as yearly, is reflected by inflation as measured by the consumer price index. In most cases, the Laspeyres formula is utilized.
- The inflation rate in 2020 was 9.74 percent, down 0.84 percent from 2019.
- The inflation rate in 2019 was 10.58 percent, up 5.5 percent from 2018.
- The inflation rate in 2018 was 5.08 percent, up 0.99 percent from 2017.
- The inflation rate in 2017 was 4.09 percent, up 0.32 percent from 2016.
|Pakistan Inflation Rate – Historical Data|
|Year||Inflation Rate (%)||Annual Change|
GDP of Pakistan
Gross domestic product (GDP) at purchaser’s prices is the sum of gross value contributed by all resident producers in the economy, plus any product taxes, minus any subsidies not included in the product value. It is estimated without considering depreciation of manufactured assets or natural resource depletion and degradation.
The figures are in current US dollars. GDP numbers in dollars are converted from domestic currencies using official exchange rates from a single year. An alternate conversion factor is employed in a few nations where the official exchange rate does not represent the rate effectively applied to actual foreign exchange transactions.
- GDP in 2020 was $263.69 billion dollars, down 5.22 percent from 2019.
- GDP in 2019 was $278.22 billion, down 11.55 percent from 2018.
- GDP in 2018 was $314.57 billion dollars, up 3.28 percent from 2017.
- 011GDP in 2017 was $304.57 billion dollars, up 9.3 percent from 2016.
|Pakistan GDP – Historical Data|
Therefore, it is recommended to the policy makers to keep inflation steady and below the level that has been demonstrated to be beneficial to achieving long-term economic growth. Inflation that is moderate and consistent is also beneficial for reducing swings and uncertainties in the financial sector of the economy, which boosts capital formation activities in the country.
The Authors are the Students of BS-III English/Department of H&SS
Supervised By Urooj Aijaz (Faculty Department of H&SS), Bahria University Karachi.