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Inflation Impact on Economy Essay

Inflation means a rise in prices of goods and services in an economy over a period of time. Inflation is caused by some demand side factors (Increase in money supply, Increase in income, Black money spending, Expansion of the Private Sector, Increasing Public Expenditures) and some Supply side factors (Shortage of factors of production, Industrial Disputes, Increase in exports (excess exports), Global factors, Neglecting the production of consumer goods).

Inflation effects the different sectors of the economy (Effects on the distribution of income and wealth, Effects on production, Effects on the Government, Effects on the Balance of Payment, Effects on Monetary Policy, Effects on Social Sector, Effects on Political environment) and different classes of the people (Debtors & Creditors, Salaried Class, Wages earners, Fixed income group, Investors and shareholders, Businessmen, Agriculturists). There are many causes for inflation, depending on a number of factors. For example, inflation can happen when governments print an excess of money to deal with a crisis.

When any extra money is created, it will increase some societal group’s buying power. All sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. In the end, the price level rises. Another common reason of inflation is a rise in production costs, which leads to an increase in the price of the final product. For example, if raw materials increase in price, this leads to the cost of production increasing, this in turn leads to the company increasing prices to maintain their profits. Inflation can also be caused by federal taxes put on consumer products.

As the taxes rise, suppliers often pass on the burden to the consumer. In Pakistan, the most important thing is the rise in prices of oil, gas, excise duties and the increase in the utility tariffs. These all has an inflationary impact on the economy. Pakistan, with a population of about 16 million people has undergone a remarkable economic growth during last few years, but the core problems of the economy are still unsolved. Inflation is one of these core problems. Government claims that in order to keep the prices of essential commodities under control, it has been taking various measures throughout the year.

In order to provide relief to the low and fixed income groups, the government has been selling wheat flour and sugar through the outlets of the Utility Stores Corporation (USC) at much lower prices than the market. The government has also allowed the import of various items through land routes from neighboring countries. But, all these are secondary measures. Problems like ‘inflation’ and ‘poverty’ can’t be resolved by applying the secondary measures directly, these need strategic planning. Unfortunately, in Pakistan, these core problems have never undergone such a planning process.

Government has never invited foreign investment for the production of basic goods. Agriculture sector, on which the major industries rely for the raw material has not been given sufficient subsidies. The major rise in the prices is because of the increasing prices of oil (as increased prices of oil increase the cost of production), but no such steps have been taken to control the oil prices. Domestic productions at less cost of production will not only make the availability of goods much easier but Aggregate Supply will also increase, and domestic industry will get developed.

Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the major part of the population. It needs to be controlled by strategic planning. Domestic production should be encouraged instead of imports; investment should be given preference in consumer goods instead of luxuries, Agriculture sector should be given subsidies, foreign investment should be attracted, and developed countries should be requested for financial and managerial assistance. And lastly a strong monitoring system should be established on different levels in order to have a sound evaluation of the process at every stage.

Inflation always hurts ones’ standard of living. Rising prices mean people have to pay more for the same goods and services. If income increases at a slower rate as inflation, the standard of living declines even if one makes more. So it is the root cause in making and affecting economy and people of the country poor. If we want to control inflation we shall have to inflict strict control over the supply of money and evading any relaxation to the supply of money. This is the most apt way whereby we can control inflation effectively and keep the economy of the country in a strong and stable position.


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