Inflation
“Inflation is taxation without legislation.” (Milton Fredman)
In economics, inflation is described as a specific situation whereby the
demand for goods exceeds the available supply. Kent is of the view that
“Inflation is nothing more than a sharp upward movement in the price
level”. There are four types of inflation categorized by their speed:
creeping, walking, galloping and hyperinflation. Some experts say
demand-pull inflation and cost-pull inflation are two more types, but
these are the causes of inflation.
The rising of prices is a worldwide phenomenon. It is acute
in developing countries. It affects everyone. The rich can, however,
afford it. The victims are the poor in society. Inflation means you have
to pay more for the same goods and services. If your income doesn’t
keep pace with inflation, your purchasing power declines. Inflation is a
measure of the rate of rising prices of goods and services in an economy.
Inflation can occur when prices rise due to increase in production costs,
such as raw materials and wages.
When the prices increase, people demand higher wages and
salaries. When they cannot put up with the rise, they resort to strikes and
demonstrations that causes chaos and maladjustment in society. When
the demands for higher wages and salaries are met with, manufacturers
increase the prices of their goods. The government too increases taxes.
Then fresh demands are made. Thus this vicious circle continues. As a
result, interest rate increases, purchasing power falls, fewer fixed rate
bank loans, persistent rise in prices, excessive supply of money, and
production begins to fall.
Those who have fixed salaries, wages and pension are in a
tight corner when prices rise. They have difficulty in making both the
ends meet, since their purchasing power remains reduced. The
Additional Dearness Allowance (ADA) that is usually sanctioned, does
not give them any relief. Lenders are hurt by unanticipated inflation
because the money they get paid back has less purchasing power than
the money they loaned out. On the other hand, borrowers benefit from
unanticipated inflation because the money they pay back is worth less
than the money they borrowed.
“Inflation is like toothpaste. Once it’s out, you can hardly get it back
in again.”
(Karl Otto
Pohl)
There are various causes for the rise in prices. Wars are one of them.
The war always creates inflation in the economy of a country. Indo-
Pakistan wars in 1965 and 1971 badly affected the people of Pakistan.
Pakistan had to devalue its currency to rebuild the economy. Our
economic planning has experienced serious drawbacks. We
implemented seven Five Years Plans. The public expenditure increased,
but the target of the Plans could not be achieved. This made the
government resort to deficit financing. The result was inflation.
International circumstances and political instability also affect the
economy of a country. The administered prices of most of the
agricultural products have created massive increase in recent years.
There is sufficient room to evade taxes and this leads to the growth of
black money. There is parallel economy mainly created by smugglers,
hoarders etc. Natural calamities like famines, earthquakes and floods can
cause inflation. Population explosion creates more and more demand.
The frequent rise in the prices of petroleum products, scarcity of raw
materials, increase in electricity charges, non-developmental
expenditure, and the liberalization policy of the government can also
cause inflation.
“Inflation is the parent of unemployment and the unseen robber of
those who have saved.”
(Margaret Thatcher)
The government should remain vigilant and take severe
action against those who are engaged in hoarding, black marketing and
smuggling. The government should decrease the public spending.
Imports should be reduced and exports should be increased. The use of
luxuries should be avoided. The Government should avoid further
devalue in currency. The existing taxation laws have to be amended so
that no one can evade paying taxes. The Government should make
effective policies to improve the economy. Industries should be set up
in the country to control inflation. Strikes must be avoided as far as
possible. The consumers should realize the rights they have and take
effective steps to get their grievances settled for collective welfare.
Sincere efforts have also to be made by the government of Pakistan to
check the growth of black money in the world. Production should be
increased for the increasing needs of the people. Otherwise, the
anaconda of inflation will swallow everything especially the moral and
social norms and values. There will be a mass hysteria and turmoil and
the state will be known as “Banana Republic”.
“It’s hard for an empty bag to stand upright.”
(Ben Franklin)