Theory of Inflation:
Inflation means a sustained rise in prices. Inflation can be Creeping, walking or trotting, running, hyper or gallop, demand pull, cost push, mixed, markup or stagflation according to velocity and nature. Inflation is caused by some demand side factors (Increase in nominal money supply, Increase in disposable income, Expansion of Credit, Deficit Financing Policy, Black money spending, Repayment of Public Debts, Expansion of the Private Sector, Increasing Public Expenditures) and some Supply side factors (Shortage of factors of production or inputs, Industrial Disputes, Natural Calamities, Artificial Scarcities, Increase in exports (excess exports), Global factors, Neglecting the production of consumer goods, Application of law of diminishing returns)
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)
Inflation can be controlled by Monetary Measures (Credit Control, Demonetization of the currency, Issue of new currency), Fiscal Measures (Curtailment in unnecessary expenditures, Increase in rate of taxes, Increase in volume of savings, Anti inflationary budgetary policy, Increasing public debt policy) and Non-Monetary and Non Fiscal Measures (Increase in volume of production, Price control and rationing policy).
A near History of Inflation in Pakistan with reference to CPI, SPI and WPI: 
Consumer Price Index (CPI) is the main measure of price changes at the retail level. It measures changes in the cost of buying a representative fixed basket of goods and services and generally indicates inflation rate in the country. The Consumer price index was computed for the first time with 1948-49 as a base for industrial workers in the cities of Lahore, Karachi and Sialkot only. Continuous efforts have been made, since then, to make CPI more representatives by improving and expanding its scope and coverage in terms of items, category of employees, cities and markets. Accordingly, the CPI series were computed with 1959-60, 1969-70, 1975-76, 1980-81 and 1990-91 as base years. At present, the CPI is being computed with 2000-01 as base year. And according to the studies of CPI, the inflation rate during the fiscal year 2000-2001 was 4.41, during the fiscal year 2001-2002 it dropped down to 3.54, further dropped to 3.10 during the fiscal year 2002-2003, rose again to 4.57 during 2003-2004, increased drastically to 9.28 during 2004-2005 and then dropped to 7.92 during 2005-2006. And by the mid of October 2006, the CPI is reported to be 8.43.
The Sensitive Price Indicator (SPI) is computed on weekly basis to assess the price movements of essential commodities at short intervals so as to review the price situation in the country. The SPI is being presented in the Economic Coordination Committee of the Cabinet (ECC). Sensitive price indicator was originally computed with 1969-70 as base which was subsequently switched over to 1975-76, 1980-81 and 1990-91 as base year. Presently, the SPI is being computed with base 2000-2001. And Sensitive Price Indicator (SPI) shows the facts as; 4.84 in 2000-2001, 3.37 in 2001-2002, 3.58 in 2002-2003, 6.83 in 2003-2004, 11.55 in 2004-2005 and 7.02 in 2005-2006. Recently (By the mid of October 2006) the SPI is reported as 9.86.
The Wholesale Price Index (WPI) is designed to measure the directional movements of prices for a set of selected items in the primary and wholesale markets. Items covered in the series are those which could be precisely defined and are offered in lots by producers/manufacturers. Prices used are generally those, which conform to the primary sellers realization at ex-mandi, ex-factory or at an organized Wholesale level. The WPI initially was computed with 1959-60 as base. Since then, continuous efforts have been made to make the WPI more representatives by improving and expending its scope and coverage in terms of commodities, quotations/markets, etc. Accordingly, WPI series were computed with 1969-70, 1975-76,1980-81 and 1990-91 as base years. Presently, the WPI is being computed with 2000-01 as base. The Wholesale Price Index (WPI) tells the story as; 6.21 in 2000-2001, 2.08 in 2001-2002, 5.57 in 2002-2003, 7.91 in 2003-2004, 6.75 in 2004-2005 and 10.10 in 2005-2006.
Evaluation of the year 2005-2006 (Government’s View):
Inflation Among the most appreciated developments, during fiscal year 2005-06, was the significant abatement of price pressure over the course of the year. For the first ten months of the fiscal year July–April 2005-06, all important barometers of price pressure in the economy indicated a steady deceleration in inflation. Inflation during the first ten months July-April of the current fiscal year is estimated at 8.0 percent as against 9.3 percent in the same period last year. Food inflation is estimated at 7.0 percent as against 12.8 percent in the same period last year. Non-food inflation at 8.8 percent is on higher side compared with 6.9 percent in the same period last year. The core inflation which excludes food and energy costs from the headline CPI, moved up and estimated at 7.7 percent as against 7.0 percent in the same period last year. House rent index also played an important role in building inflationary pressure this year. With second largest weight in the CPI (23.4%) after food (40.3%), the house rent component of the CPI registered a marginal decline to 10.3 percent as against 11.1 percent in the same period last year. When viewed in the context of year-on- year performance of inflation, the current fiscal year exhibits significant abatement of price pressure and declaration in overall inflation as well as its sub-indices. The current fiscal year, started with an inflation rate of 9.0 percent in July 2005, but continued to decelerate, reaching at 23 months low at 6.2 percent in April 2006. Food inflation was closed to 9.7 percent at the beginning of the current fiscal year but decelerated sharply to 3.6 percent in April 2006- the lowest in the last 31 months. The measures taken by the Government, particularly since April 2005, when overall inflation reached 93 months high at 11.1 percent (the last time inflation was at this level in July 1997) and food inflation peaked at 15.7 percent in April 2005 (last-time it was at 15.7 percent in May 1994), yielded handsome dividend in the shape of overall inflation decelerating to 6.2 percent and food inflation to 3.6 percent in April 2006. Notwithstanding a steady deceleration in inflation, the prices of some of the essential food items (out of the basket of 370 items in CPI) registered sharp increases, particularly during the second half of the fiscal year and therefore adversely affected the low and fixed income groups. The expenditure on food items constitutes bulk of the monthly expenditure of the poor segment of the society. Sharp increases in the prices of some of the strategic food items put pressure on the poor. The higher inflationary trend in Pakistan over the last two years has been the outcome of pressure that emanated from demand and supply sides. Four years of strong economic growth has given rise to the income levels of various segments of the society. The rising level of income have strengthened domestic demand and put upward pressure on prices of essential commodities. Supply side pressure emanated from a variety of factors, prominent among those are: increase in support price of wheat for three years in a row, shortage of wheat owing to less than the targeted production, mismanagement in wheat operation in one of the wheat deficit province, inter-provincial ban on the movement of wheat resulting in sharp increases in prices of wheat and wheat flour. The prices of other food item such as beef, mutton, chicken, milk etc also registered sharp increases owing to “sympathy effect” on the one hand and demand pressure on the other. Lower production of sugar due to a relatively lower production of sugarcane and a sharp increase in the international prices of sugar brought about by a significant diversion of sugarcane into ethanol (petroleum substitute), by the largest producer, Brazil, also contributed in building inflationary pressure in Pakistan. Prices of various kinds of pulses also registered sharp increases owing to a significant decline in domestic production as well as shortages in international markets. This inadvertently kept the prices of pulses at record high level. An unprecedented rise in international oil prices also contributed to the build up in inflationary pressure in Pakistan.
Pakistan, with a population of about 16 million people has undergone a remarkable macro 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. These measures include: a liberal import regime for food items including zero rating of the imports of these commodities. 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. In order to augment supplies of essential commodities in shortest possible time and at lower freight charges, 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’ etc can’t be resolved by applying the secondary measures directly, these need strategic planning. Unfortunately, in Pakistan, these core problems have never undergone such 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, or at least lessen the effect. Selling basic food items at USC is not an achievement. Did this step have the effective distribution of goods? No, privileged group has taken the major part of goods from these USCs, and the poor couldn’t have access over these basic goods even then. Government further claims that the role of the Trading Corporation of Pakistan (TCP) has been enhanced. The TCP is active in importing sugar from around the world to build up strategic reserves with a view to continue selling sugar at less than the market price through the USC. The TCP has also been asked to import various kinds of pulses to meet the domestic consumption requirements and stabilize their prices in the country. In my opinion, TCP should plan the process by which we can have the maximum production at lower cost at home, instead of formulating plans to import the items. 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.
 Federal Bureau of Statistics
 Economic Survey of Pakistan 2005-2006
* Economic Theory (K.K. Dewett, P. A. Samuelson, Parkin)
*Journals of the Chief Economist of WB (The Writer)
Filed under: Pakistan Economy