Inflation, in simple terms, is one of the most crucial macroeconomic variables which has a very significant impact on the performance and the growth of an economy. This is why the central banks usually aim at maintaining price stability. Inflation is basically understood as consistent rising prices which are experienced in an economy. It affects every individual in the nation and this is probably one of the reasons why everyone understands it and related to it. It is feared by all because inflationary trends often lead to an increase in the price of the necessities and other purchasing commodities as everything becomes relatively expensive. Inflation is seen to occur when a lot of money is being circulated in the economy. When such situation arises, one of the steps to avoid the collapse of an economy (because of excessive inflation) is to reduce the money supply. Governments fear high inflation as it can have negative impacts, like reduction in the purchasing power. If the inflationary trend continues for a long time, then people often lose faith in the currency itself.
However, it should be remembered that moderate level of inflation which is also backed by the growth of an economy is not dangerous for an economy. Historically, people have actually observed the collapse of various economies. This has occurred because remedial measures were not taken to correct the inflationary trend in the economy. At present, one such economy which is experiencing a dramatic rise of prices is Pakistan. Pakistan is a growing economy in the South Asia which is still semi-industrialized, but has a fully developed agricultural economy.
One significant characteristic that has been observed over the years is that Pakistan has been heavily importing oil. However, what needs to be understood here is that the real foreign exchange is less and this means that the effect of this will be directly felt on the economy. Also, if the imports are kept at such high rates, then this makes the economy more sensitive to changes in the global economy. One of the reasons behind inflation that the experts have been stating is this heavy importation of the oil into the economy.
If one looks at the statistics which have been published by the Pakistan Bureau of Statistics (PBS), inflation has risen to 8.21% in the month of February this year. This rise is said to be the highest that has been noted in the past four years, and is far more than moderate level of inflation which needs to be allowed to prevail in the economy. The analysts have said that the reason behind this surge in prices is the rupee devaluation and the increase in the prices of the perishable products. The rupee has seen to be constantly falling when compared to the US Dollar. The depreciation of the rupee can be attributed to the imbalances in the external debts and to the inefficient management of the financial flows. The food inflation was seen to be rising by 4.5%. Along with this, increase in gas and electricity costs has also led to the increase in the prices.
However, on a positive note, as per predictions, the oil prices are estimated to stay low in the future. This would lead to a reduction in the prices of the products which use petroleum. But again, the limited fiscal planning could cause problems to the economy. The government should manage the deficit better, otherwise, it is predicted that the only way out of this situation is the increase in taxes which is not really recommended.
To sum it up, inflation has not reached dangerous levels in Pakistan. However, the uptrend of prices has been noticed, wherein the inflation has crossed the moderate levels. If this is allowed to continue, then it will lead to hyper inflation which cannot be absorbed by the growth of the economy. The government should take effective measures to ensure that it does not reach excessive levels which would harm the economy. It will affect the growth of the economy. Moreover, since it is a middle-income country, the brunt of the high prices will be felt even more. Pakistan is a growing economy and in such a scenario, the fall or collapse of an economy will make it hard to revive the economy. Some effective measures need to be taken, immediately and for the betterment.
Picture Credits : samaa.tv