Causes of Inflation in Pakistan

Inflation is a complex economic phenomenon that can be driven by various factors. In the context of Pakistan, several causes have historically contributed to inflation. Here’s a breakdown of some of the primary causes of inflation in Pakistan:

What is Inflation?

Inflation refers to the rate at which the general level of prices for goods and services rises, causing purchasing power to fall. In other words, when inflation is present, every unit of currency buys fewer goods and services than it did previously.

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Here’s a more detailed breakdown:


  • Inflation is usually measured as an annual percentage increase in the Consumer Price Index (CPI) or the Wholesale Price Index (WPI), depending on the country. The CPI reflects the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, while the WPI focuses on wholesale-level prices.
Causes of Inflation in Pakistan - Salary Inflation Calculator Pakistan

Types of Inflation:

    • Creeping or Mild Inflation: When the rise in prices is slow and the annual inflation rate is not very high, usually 2-3% per annum.
    • Walking or Moderate Inflation: This refers to inflation in the range of 3-10% per year. Here, the price increase is moderate, and the economy might adjust to this level of inflation.
    • Running Inflation: This is when prices rise between 10% to 20% a year. It’s harder for the economy to cope with this type of inflation without showing negative growth effects.
    • Hyperinflation: Extremely high inflation, often exceeding 50% per month. This can quickly erode real savings and can be very damaging to an economy. Historical examples include post-World War I Germany and more recently, Zimbabwe and Venezuela.
    • Stagflation: A combination of stagnant economic growth, high unemployment, and high inflation. It’s an unusual situation since inflation and unemployment are typically seen as having an inverse relationship.
    • Deflation: The opposite of inflation, deflation is the decrease in the general price level of goods and services. It increases the real value of money but can lead to reduced consumer spending, as people anticipate further decreases in prices.

Causes of Inflation in Pakistan

  1. Monetary Factors:
    • Expansionary Monetary Policy: Excessive money supply growth, which exceeds the growth in output, can lead to inflation. When there is too much money chasing too few goods, prices rise.
    • Government Borrowing: The government of Pakistan often borrows from the central bank. When the central bank prints more money to finance the government’s debt, it can increase the money supply, leading to inflation.
  2. Supply-Side Factors:
    • Agricultural Output Fluctuations: Agriculture is a significant part of Pakistan’s economy. Fluctuations in agricultural output, due to unpredictable monsoon rains, pests, or other factors, can lead to volatility in the prices of food items.
    • Supply Chain Disruptions: Issues in transportation, strikes, or international supply chain disruptions can affect the availability of goods, leading to price hikes.
    • Oil Prices: Pakistan is heavily reliant on oil imports. A spike in global oil prices or devaluation of the Pakistani Rupee can increase the cost of imported oil, which has a cascading effect on other sectors, from transportation to manufacturing.
  3. Demand-Side Factors:
    • Growing Middle Class: As the middle class expands, there’s increased demand for goods and services, which can push prices up, especially if supply doesn’t keep pace.
    • Population Growth: Pakistan has a high population growth rate. Increased demand from a growing population can outstrip the available supply of goods and services, leading to inflation.
  4. Structural Factors:
    • Taxation and Tariffs: An increase in indirect taxes (like sales tax) can increase production costs, which are often passed on to consumers in the form of higher prices.
    • Imported Inflation: A significant portion of Pakistan’s consumption basket consists of imported goods. If the prices of these goods rise internationally or if the Pakistani Rupee depreciates, it can lead to imported inflation.
  5. Expectation-Driven Inflation:
    • Wage-Price Spiral: This occurs when workers demand higher wages and, if they get those wages, businesses then raise their prices to cover the higher wage costs. This can create a feedback loop, as the cycle repeats itself.
  6. External Factors:
    • Foreign Aid and Loans: Sometimes, the conditions attached to foreign aid or loans (from entities like the IMF) can require structural adjustments or austerity measures that can influence inflation.
    • Global Economic Conditions: Economic conditions in major trade partners or global economic trends can influence inflation in Pakistan, especially through the trade channel.
  7. Government Policies and Regulations: Changes in government policies, regulations, or subsidies can influence the costs of production or the price of goods and services.
  8. Black Market and Speculative Activities: Hoarding, black markets, and speculative buying can create artificial shortages, leading to price hikes.

It’s important to note that while any single factor can influence inflation, it’s often the interplay of several factors that drives the inflationary trend in an economy. Additionally, the causes of inflation can vary over time, depending on both domestic and global economic conditions.

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پاکستان میں مہنگائی کی وجوہات

مہنگائی ایک پیچیدہ معاشی ظاہرہ ہے جسے مختلف عوامل چلا سکتے ہیں۔ پاکستان کے مواقع پر، مہنگائی کے مختلف باعث ہوتے ہیں۔ پاکستان میں مہنگائی کے اہم باعثوں کا جائزہ یہاں دیا گیا ہے:

مالی عوامل:

  • وسیع مالی پالیسی: زیادہ مقدار میں پیسے کی فراہمی، جو خروج کی افزایش سے زیادہ ہوتی ہے، مہنگائی کی وجہ بن سکتی ہے۔ جب زیادہ پیسے چھوٹی مقدار کے اشیاء کی طرف دوڑتے ہیں، قیمتیں بڑھ جاتی ہیں۔
  • حکومت کی قرضہ اُٹھانا: پاکستان کی حکومت اکثر مرکزی بینک سے قرضہ اُٹھاتی ہے۔ جب مرکزی بینک حکومت کے قرضہ کی مالیت فراہم کرنے کے لئے زیادہ پیسے چھاپتا ہے، تو یہ پیسے کی فراہمی میں اضافہ کرتا ہے، جو مہنگائی کی طرف مائل ہوتا ہے۔

ترسیل کی طرف سے عوامل:

  • زراعتی خروج کی لہریں: زراعت پاکستان کی معیشت کا اہم حصہ ہے۔ زراعتی خروج میں لہریں، غیر یقینی مونسون بارشوں، کیڑوں یا دیگر عوامل کی بنا پر، کھانے پینے کی اشیاء کی قیمتوں میں پریشانی کی وجہ بن سکتی ہے۔
  • ترسیلی سلسلے کی توقفات: نقل و حمل میں مسائل، ہڑتالیں یا بین الاقوامی ترسیلی سلسلے کی توقفات، اشیاء کی دستیابی پر اثر انداز ہو سکتی ہے، جو قیمتوں میں اضافہ کی طرف مائل ہوتی ہے۔

Effects of Inflation:

  • Purchasing Power: As mentioned earlier, one of the most noticeable effects of inflation is the reduction of the purchasing power of a nation’s currency.
  • Uncertainty: High inflation rates can lead to uncertainty in the economy, leading to reduced spending and investment.
  • Distributional Effects: Inflation can affect different groups differently. For instance, borrowers benefit from unexpected inflation if they’ve taken fixed-rate loans, whereas lenders stand to lose. On the other hand, those with fixed incomes, like retirees, might find their purchasing power diminished.
  • Menu Costs: With high inflation, companies need to change their prices often to keep up with economy-wide changes. These frequent changes are costly and are termed menu costs.
  • Asset Allocation: Inflation can influence where and how individuals and institutions allocate their assets. For instance, during high inflationary periods, real estate and gold often become attractive investment options.

Controlling Inflation:

  • Central banks, like the Federal Reserve in the US or the European Central Bank in the Eurozone, use monetary policy tools like interest rates and open market operations to influence inflation. For instance, raising interest rates can help reduce inflation.
  • Fiscal policies, such as increasing taxes or reducing government spending, can also be used to control inflation.

Expectations and Inflation:

  • People’s expectations about future inflation can influence their spending and saving habits today. If people expect higher prices in the future, they’re more likely to buy now rather than later. This can, in turn, drive up prices in a self-fulfilling prophecy.

Frequently Asked Question

Q1: What are the 5 main causes of inflation?

The 5 main causes of inflation are:

  1. Expansionary monetary policy leads to an excessive money supply.
  2. Demand-pull inflation, where demand for goods and services exceeds supply.
  3. Cost-push inflation, where the costs of production rise, pushing up prices.
  4. Built-in inflation or wage-price inflation, which is caused by the wage-price spiral.
  5. External shocks, such as a spike in global oil prices or significant global events.

Q2: What are the 7 causes of inflation?

The 7 causes of inflation include:

  1. Expansionary monetary policy and excessive money supply.
  2. High demand for goods and services (Demand-pull inflation).
  3. Rising costs of production (Cost-push inflation).
  4. Built-in or wage-price inflation.
  5. External factors such as global economic conditions and oil prices.
  6. Structural issues, like changes in taxation, regulations, or import tariffs.
  7. Supply-side shocks, such as natural disasters or supply chain disruptions.

Q3: What are the three main causes of inflation?

The three main causes of inflation are:

  1. Demand-pull inflation: This occurs when there is an increase in aggregate demand, categorized by the four sections of the macroeconomy: households, businesses, governments, and foreign buyers, which outpaces aggregate supply.
  2. Cost-push inflation: It happens when there’s a supply-side interruption, such as an increase in the costs of production or a reduction in the supply of goods, causing prices to be pushed up.
  3. Built-in inflation (or wage-price inflation): It’s driven by the wage-price spiral. It means that workers demand higher wages and, if they receive those wage increases, businesses then raise their prices to cover the increased wage costs.

Q4: How to solve the inflation problem in Pakistan?

Solving the inflation problem in Pakistan would require a multi-pronged approach:

  1. Tightening Monetary Policy: The State Bank of Pakistan could raise interest rates to curb excessive money supply.
  2. Diversification of the Economy: Reducing dependence on agriculture and focusing on other sectors can mitigate supply-side shocks.
  3. Stabilizing Exchange Rates: This can help in reducing imported inflation.
  4. Improving Supply Chain Infrastructure: Ensuring smooth transportation and storage facilities can mitigate supply-side disruptions.
  5. Encouraging Savings: The government can introduce schemes to promote savings, which reduces disposable income and curbs excessive demand.
  6. Strategic Reserves: Maintaining reserves for essential commodities can help in stabilizing prices.
  7. Monitoring and Regulation: Keeping a check on hoarding, black markets, and speculative buying.
  8. Foreign Trade Policies: Import substitution and promoting exports can help in stabilizing foreign exchange reserves and reducing dependence on imports.