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What Explains the Current High Rate of Inflation in Pakistan?

Listed author(s):
  • M. Aynul Hasan

    (CIDA and Acadia University, Canada.)

  • Ashfaque H. Khan

    (Pakistan Institute of Development Economics, Islamabad.)

  • Hafiz A. Pasha

    (Institute of Business Administration, Karachi.)

  • M. Ajaz Rasheed

    (ISSP, Karachi.)

Registered author(s):

    One of the most significant developments in the current economic scene in Pakistan has been the sharp increase in the rate of inflation. The annual average rate of increase in the wholesale price index (WPI) during the first seven months (July-January 1994-95) of the current fiscal year has been about 19 percent as opposed to 11.3 percent during the same period last year. A similar increase was also witnessed in the consumer price index (CPI) which accelerated to 13 percent as opposed to 11.1 percent during the previous period. Such a sharp increase in prices in recent months has not only caused alarm in the academic circles but has equally disturbed the country’s chief executive, the Prime Minister. The recent surge of inflation is a matter of serious concern for a variety of reasons. First, Pakistan has been a low-inflation country as it has experienced price stability during the last three decades. The rate of inflation, as measured by an increase in the WPI, averaged 2.6 percent during the 1960s. The components of the WPI, i.e., food, raw materials, manufactures, and fuel and lubricants, also grew by an average rate ranging from 2.0 to 3.4 percent p.a. during then 1960s (see Table 1 for relevant statistics). The rate of inflation crossed the single-digit threshold during the 1970s. The WPI and its components increased at an annual average rate ranging from 12 to 18 percent. The double-digit inflation during the 1970s has been the result of two major oil shocks, a massive devaluation of currency, and devastating floods destroying agricultural crops. Pakistan returned to the fold of the single-digit inflation during the 1980s. The rate of inflation remained at the single-digit level during the first three years of the 1990s with the exception of 1990-91, when the rate of inflation increased to 11.7 percent as a result of the Gulf War. It is only during the outgoing fiscal year and in the current year that the rising inflation is posing a major threat to macroeconomic stability.

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    Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

    Volume (Year): 34 (1995)
    Issue (Month): 4 ()
    Pages: 927-943

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    Handle: RePEc:pid:journl:v:34:y:1995:i:4:p:927-943
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    1. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1.
    2. Friedman, Milton, 1971. "A Monetary Theory of Nominal Income," Journal of Political Economy, University of Chicago Press, vol. 79(2), pages 323-337, March-Apr.
    3. Anna J. Schwartz, 1987. "Secular Price Change in Historical Perspective," NBER Chapters,in: Money in Historical Perspective, pages 78-109 National Bureau of Economic Research, Inc.
    4. Frisch, Helmut, 1977. "Inflation Theory 1963-1975: A "Second Generation" Survey," Journal of Economic Literature, American Economic Association, vol. 15(4), pages 1289-1317, December.
    5. Milton Friedman, 1971. "Correspondence of the Monetary Theory of Nominal Income with Experience," NBER Chapters,in: A Theoretical Framework for Monetary Analysis, pages 46-48 National Bureau of Economic Research, Inc.
    6. Milton Friedman, 1971. "Some Dynamic Implications of the Monetary Theory of Nominal Income," NBER Chapters,in: A Theoretical Framework for Monetary Analysis, pages 40-43 National Bureau of Economic Research, Inc.
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