Institute of Business
Management
Inflation is a Combine
effect of Demand Pull
and
Cost
Push
Factors
April 26
2012
Evidences from Pakistan Economy
The objective of this paper is to investigate the rel ationship
between Infl ation and, dem and pull and cost push factors
com bined. For this purpose the historical data, on Econom y
of Pakis tan, has been obtained from the SBP (State Bank o f
Pakistan) website and FBS (Federal Bureau of Statistics), whil e
an anal ytic al and em pirical study has been conducted to
eval uation the subject.
By Ad eel A. Sidd iq ui (2010 – 1 – 27 – 11262)
Letter of Acknowledgement
To whom it may concern.
This l etter is to acknowledge the superv ision , effort and sin cerity ,
offered by the course instructor Mr. M. Ashraf Jan jua, to teach the
subje ct and prov ide adequate guidel ines for the purpo seful
complian ce of this thesis. The accompl ishment of this thesis is a
resul t of a combine effort made by the researcher and the
superv isor (Mr. M. Ashraf Jan jua), during the term spring 2012. The
obje ct ive to write th is Thesis is t o invest igate the rel ation ship
between Inflation and the factors Cost Push an d Demand Pul l
together, in the Economy of Pakist an. I hereby acknowledge that
during the 23 r d session of Sem inar in Economic Pol icy conducte d
by Mr. M. Ashraf Jan jua, dated 16 t h April ’12, prov ided sign if icant
guidance and direct ion, to accompl ish the subje ct thesis.
Gracias,
Adeel A. S iddiqui
2010 – 1 – 27 – 11262
ii | P a g e
Letter of Transmittal
To,
Mr. Ashraf Jun jua,
Instit ute of Business Management,
Dear S ir,
I am subm itt ing this thesis on “I nfl ation is a com bined resul t of co st
push and demand pull factors”, which is based on the evidences
from Pakistan Economy. To serve the purpose of this research , I
have used few authentic data and l iterat ure so urces on the
internet, while to invest igate and conduct an anal yt ical an d
empirical research and stat ist ical anal ysis, I have used SPSS
software support . The results from this re search are subje cted t o
vary for the evidence from various different struct ures and sizes of
other economies.
Gracias y Sal udo s,
Adeel A. S iddiqui
2010 – 1 – 27 – 11262
iii | P a g e
Abstract
The object ive of th is paper is t o invest ig ate the rel ationsh ip
between Inflation and, demand pul l and cost push factor s
combined. For this purpose the historical data, on Economy of
Pakistan , has been obtained from the SBP (State Bank of Pakistan )
website and FBS (Federal Bureau of Stat ist ics), wh il e an anal ytical
and empirical study has been conducted to eval uat ion the
subje ct .
There are several controll abl e and uncontrol l abl e causes of
Infl ation, but in the case of th is invest ig at ion, the correl at ion
between Inflation and co st push and demand pul l factors
combined has been taken into considerat ion. The theoretical
framework of the study is designed to study response s of changes
in Government Expenditure as g enerating aggregate demand
and changes in exchange rate as push ing the cost , generating a
combined effect on I nflation.
iv | P a g e
Table of Contents
Letter of Acknowledgement .............................................................. ii
Letter of Transm itt al .......................................................................... iii
Abstract ............................................................................................. iv
Tabl e of Contents ............................................................................... 1
Introduct ion ........................................................................................ 3
Literature Review ............................................................................... 4
1.
Note on I nflation ..................................................................... 7
1.
Inflation, Deficit .................................................................... 8
2.
Inflation, Credit ..................................................................... 8
3.
Inflation, S carcity .................................................................. 8
4.
Inflation, Prof it ...................................................................... 8
5.
Inflation, Oligopol ist ic (Pricing Power) ................................ 8
6.
Inflation, Tax ......................................................................... 8
7.
Inflation, B uild-In ................................................................... 8
8.
Inflation, Development ........................................................ 9
Inflation, Fiscal ...................................................................... 9
9.
10. Inflation, Populat ion ............................................................. 9
11. Infl ation, Se ctarian ............................................................... 9
12. Foreign Trade I nduced I nfl ation .......................................... 9
Factors of I nflation .................................................................. 9
2.
1.
Cost Push I nfl ation ................................................................ 9
2.
Demand Pull Inflation ......................................................... 10
3.
Combined effect ................................................................... 12
Research Methodology ................................................................... 12
1.
Hypothesis .............................................................................. 12
2.
Theoretical Framework .......................................................... 12
3.
Technique .............................................................................. 12
Data S ubject ive Anal ysis ................................................................. 13
1.
FY ‘01 ..................................................................................... 13
2.
FY ‘02 ..................................................................................... 13
3.
FY ‘03 ..................................................................................... 14
4.
FY ‘04 ..................................................................................... 14
5.
FY ‘05 ..................................................................................... 14
6.
FY ‘06 ..................................................................................... 14
7.
FY ‘07 ..................................................................................... 15
8.
FY ‘08 ..................................................................................... 15
I n fl a ti on i s a Co mb in e effect o f Dema n d Pu l l an d Co st Pu sh Fa cto r s
<Tabl e of Contents
9.
FY ‘09 ..................................................................................... 15
10. FY ‘10 ..................................................................................... 15
Empirical Test ing .............................................................................. 16
1.
Correl ation Test ing ................................................................ 16
Interpretation ............................................................................. 16
2.
Covariance ............................................................................ 16
Interpretation ............................................................................. 17
3.
Regression .............................................................................. 17
Interpretation ............................................................................. 17
Interpretation ............................................................................. 18
4.
Two Way ANOVA Te st ............................................................ 19
Interpretation ............................................................................. 19
Trend An alysis ................................................................................... 19
Interpretation ............................................................................. 20
Results ............................................................................................... 20
Conclusions ...................................................................................... 21
Works C ited & References ............................................................... 21
List of Tables
Table
Table
Table
Tabl e
Tabl e
Tabl e
1:
2:
3:
4:
5:
6:
Data Set ............................................................................. 13
Correl ation ......................................................................... 16
Covarian ce ........................................................................ 16
Regression - Inflation due to G. Exp Change ................... 17
Regression - Inflation due to Ex. Rate Change ................. 18
Two Way ANOV A Test ......................................................... 19
List of Figures
Figure 1 : Trend Comparison ............................................................. 20
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Introduct ion
Introduction
During the past few decades, despi te of other economic probl em,
infl ation has sign if icantly drawn the attention of economist , al l
around the world. The debate to f ind the possibil it ie s, to ach ieve
two major m acroeconom ic goal s of utmost im portance that is l ow
rate of inflation and low rate of unempl oyment, has been prim ary
interest amongst all economist . Many theorist and researcher
devoted their l abors in finding the determinants and the resul tant s
of infl ation, in the overal l framework of the economies, while
aim ing to find ways to ach ieve reasonabl e sust ainabil ity and
control over them. The nat ure an d struct ure of various econom ie s
with respect to the strateg ic ge o – pol it ical l ocation react s
discordantly and require several different measures to achieve
optimum control over infl ation. On a broader spectrum each
factor of inflation working independentl y, can be considered t o
create sim ilar effects, in every size , shape, nat ure of economy, as
the rel ationship between Suppl y and Demand is the simpl est
explanation and a proven postul at e as a whole, for every one of
them.
During the present reg ime in Pakistan h igh infl ation has been
emphasized as a persistent pro bl em, l eading and creat ing
difficul ties, for both Government and the governed. Th is has been
superf icially indicated and identif ie d that the infl ation pro bl em is
a resultant of im proper coordination of Fiscal and Monetary
pol icies and dev iated impl ementations, at l arge. Moreover it is
destabil izing the entire economy. S ign if icant in it iat ive s had been
taken by SBP, through increasin g disco unt rates and other
contract ionary measures, but due to heavy Government
borrowing to f inance Fiscal deficit s spe cif ical l y, created a
nul l ifying effect and the desired outcomes were not ach ieved.
This st udy mainly focused the com bined effect of cost push and
demand pulls over the infl ation . To begin w ith the invest igat io n
about the com bined effect of co st push and demand pul l factors ,
on, primarily they must be surf aced. I n the foll owing section there
is a quick overv iew on inflation and it s factors and determ inants.
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Literature Review
Literature Review
Fol l owing is the comprehension on infl ation devel oped from tex t
reading and literature review, of the papers mentioned in the
references and citat ion s.
I nfl ation is a persistent increase, in the general price l evel of all
goods and serv ices in a certain eco nomy, during a certain perio d,
which l eads declinat ion in the purchasing power of the medium o f
exchange. Any determ inant of inflat ion can onl y base on eithe r
excessive demand or short age of suppl y. The factors based on
demand are increase in money suppl y, expendit ure, in come ,
growth of priv ate sector etc. whereas the factors based on suppl y
are shortages due to short pro duct ion of con sumer goods ,
scarcity of factors of pro duct ion, exports boom , industrial issue s,
etc.
Infl ation disturbs different cl asses of residents and sectors o f
economy. Generally inflation is welcomed by debtors, pro ducers
and businessmen, wh ile the effected of infl ation can be from f ixe d
income group, sal aried cl ass, agricul turist s, businessmen, creditors
and debtors, shareholders and investors, and wage earners.
Infl ation dist urbs government sect or, product ion sectors, weal th
and income distribut ion , pol it ical and so cial environments an d
monetary policy .
Determinant s of Inflation are based on various factors, and can
be a resultant of certain measure s taken by the government. For
example, an expansionary monetary pol icy is made to work in an d
with any cal am ito us condit ion . Go vernment borrowing can l ead
to excess prints of money in it ial l y resul t in deval uat ion of currency
and ultimatel y increases the purch asing power of the consumers .
Due to inflat ion, people gets driven to purchase the commodit ie s,
instead of sav ing , which resul t in rising demand and can cause
shortage of commodit ies, and ul tim atel y it wil l increase the price
l evel of general goods and serv ices.
Common factors and causes of infl ation is the increase in
product ion cost and aggregate demand. These factors wil l
ul timately increase price of f inal good or serv ice . Whenever the
raw material or component prices l evel s in crease s, cost of
product ion also increases and to absorb the cost of product ion ,
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without lower the profit marg ins, the producers and business
increase the prices of the ir goods and serv ices, w ith the onl y aim
to sustain and maintain their prof its. Federal and prov incial taxe s
which are impo sed on the consumer goods, m ay al so cause
infl ation and as there is an incre ase in tax l evels, prices are
subje cted to in crease as wel l , by the producers and suppl ier, t o
pass on the burden, wh ich is ul timat el y bared by the consumer.
During past few decades, Economy of Pakist an has shown a rapid
economic growth, de spite of the existence of several huge
problems with in the economy, which are required to be sol ved as
soon as possible. Amongst few pro bl ems headl ining the concerns ,
infl ation is draw ing the attention of the economists, and now wit h
13% during FY ’11 inflation is heading the l ist . Few signif ican t
factors causing inflat ion to increase, is an increase in ut il ity tariff s
due to short age of ut ilit ie s, excise dut ie s, and f uel prices. Every
singl e and indiv idual
factor contribute s and effects in
combinat ion w ith other, resul ting in the increase in infl ation rate.
Several necessary measures and steps are required to be taken by
the government, in order to prov ide rel ief, to the general publ ic ,
in buy ing necessity goods. One of the signif icant measures t aken
by the governments, in the h isto ry , is the prov isional offering and
distribut ions of the wheat fl our and sugar at rel ativel y l ow price s
at the Ut il ity Stores Corporat ion . The outl ets of Ut il ity Store s
Corporat ion have been establ ished in vario us areas to offer price
rel axation to the people with medium and l ow real income
groups.
A remarkabl e secondary measure , to control infl ation is to impo rt
many goods specially commodit ies, from I ndia through l and
routes, wh ich w ill definitely hel p in easing the infl at ion probl em .
But it has become such a severe issue that cannot be resol ved
without
a
properly
planned strategy . Unfortunatel y,
the
government of Pakist an was unabl e to make and impl ement any
proper and effective strategy , which can hel p it to control this
huge problem of inflation, as secon dary measure s cannot control
this persistent problem.
The economy of Pakist an majorl y rel ies on the product ion fro m
agriculture sector, but unfortunate l y, the government has been
ignoring this sector, constantl y, which is resul t ing into a rel ativel y
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sl ower growth rate in this part icul ar secto r. Neither fore ign
investments are encouraged to inv est and amel iorate th is se ctor
and increase its pro duct iv ity , nor does the government itsel f show
their interest for the growth of this sector, by taking measures such
as prov iding adequate subsidies and rel axation s. During the past
few years, increase in oil price s, in the international markets, i s
one of the sign if icant factors of the evident increase in general
price l evels and the government concerns are l ower than the
ignorant level . The government is unabl e to control this probl em ,
al though if the fuel prices are cont roll ed, their sign if icantl y affect
the cost of pro duct ion and ul t im ate in creasing the pricing of
every goods and serv ice , can be brought to an acceptabl e level .
If somehow the oil prices decrease s and maintained at a certain
l evel , automat ically the cost of product ion and ul timatel y the
pricing of goods and services w il l al so decreased and sust ained
and the economy will be stabil ized. Moreover, due to the
reduct ion in co st of product ion , aggregate suppl y w il l al so
increase , mat ch ing the aggregate demand.
During the pre sent regime , Pakist an witnessed several shocks an d
depression , wh ich are somewhat l inked and can be part ial l y
considered as a resul tant of inco ntroll abl e infl ation, w ithin the
economy. This persistent issue and inevitabl e probl em must be
sol ved and brought to the government control , prim aril y, so that
the economy can be put on the road on devel opment and
growth. A proper and effect ive strategy must be formul ated an d
impl emented to serve the very purpose of governance. Measure s
must be t aken to control and maint ain the price l evel of necessit y
goods, and these m ust be prioritized over the durabl es an d
luxurious goods. Certain provisions must be formul ated to rel ief
the agricultural sector, e ither by providing adequate subsidies o r
taxat ion based rel axat ions. Government must provide assistance s
to develop and in crease domest ic pro duct iv ity , despite of the
impo rts and such measure to att ract and enco urage foreig n
investment and management into the publ ic an d private se ctor
must be taken. I n addit ion to these, a candid and efficien t
monitoring , pro je ct ing and eval uat ing system must be establ ished
and deployed, wh ich m ust accurat el y eval uate the effectiveness
of each measure taken to eradicate exist ing and pro jecte d
problems.
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One of the most sign if icant and noteworthy, root cause s of
infl ation is the unlim ited government spending. During this regime ,
government borrowings had increased to the highest l im it s in the
history of the co untry , which is due to f inancing of consistent
budget def icit . These budget def icits are the eminent resul ts of
the uncontrollable government spending .
Stagnant I nflation is not good for the economy as well . One of the
basic disadvantages of stagnant infl ation is that it reduces the
standard of liv ing, for the reason of high prices of goods an d
services. The rise in inflat ion must not be more than the rise in the
salaries and wages of average individual s, because th is can l ead
to the reduction in purchasing power of the peopl e; they may not
be abl e to purchase required goo ds an d serv ices, and ul t imatel y
decreasing the living standards. To facil itate the prevention of
poverty in a co untry , money suppl y must be adequate ,
maintained and well managed and it must not be excessive , as
extraordinary monetary expansion can resul t in infl at ion, as well .
The adapt at ion of several prevention tool , does not ensure
l im it ing inflat ion to a desirabl e l evel, there is a need of cont inuou s
and prompt response s to the market condit ion, wh ich can onl y
hel p the government in maintain ing infl ation .
1.
Note on Inflation
Infl ation being one of the key macroeconomic goal s has been
widel y st udied by many econom ists and researchers. There is a
basic def in it ion of I nflation.
Infl ation is a const ant augmentat io n, over a cert ain perio d, in the
general price level of all goods and serv ices in a certain
economy, wh ich leads decl inat ion in the purchasing power of the
medium of exchange. I nfl ation is a resul tant of pressure s
generated by several internal and external sources and fro m
either sides of the economy , w hich is suppl y and demand .
Infl ation Rate is the percentage change in certain price indice s
over a period, normally CPI , Consumer pricing index, in the case
of Pakistan .
New scient if ic defin it ion of Infl ation is that it is caused when one
sector trie s to live of another sector in an economy.
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This def init ion of Inflation has evol ved through various stages w ith
the developments in the study of economies, and these can be
cl assif ied by the ir causes, into fol l owing few types, which can
coexist in an economy .
1. Inflation, Deficit
When the Inflation is cause d due t o deficit financing , it is cal l ed
deficit I nflation.
2. Inflation, Credit
Infl ation caused by excess back credit and money suppl y , in the
economy.
3. Inflation, Scarcity
I t is a ty pe of inflation which is caused due to scarcity , shortage s
either naturally or artif icially created. Natural l y means of creating
such infl ation can be catastrophe, drought , etc due to which the
suppl y goes below the level of demand, whil e art if icial l y it i s
caused by hoarding, which is il l egall y done by traders by hol din g
commodit ie s and create art if icial shortfall of suppl y , to earn mo re
profits. This causes an abrupt increase in the ir prices.
4. Inflation, Profit
I t is a type of inflation which is caused due to the increase in the
profit marg ins, by investo rs and businessmen, and ul t imately
resul ts in increasing price level s.
5. Inflation, Oligopolistic (Pricing Power)
I t is a type of inflat ion which is caused when businesses increase
their prices w ith the object ive s t o generate more profits, and
knowing that their product demand is price inel astic.
6. Inflation, Tax
I t is caused due to the increase in the price l evel s by passing on
the burdens of indirect taxes.
7. Inflation, Build-In
I t is caused due to the increase in prices by the increase in the
increase in salaries and wages, to adapt w ith expe ctat ions an d
demands of the workers.
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8. Inflation, Development
Increase in prices due to the development expenditures. Th is can
be expl ained as the effect on prices due to the increase in
demand due to the increase in in comes.
9. Inflation, Fiscal
Infl ation caused due to the increase in government expenditure ,
which re sults in increasing the demand. I t may cause f iscal
deficits as wel l.
10.
Inflation, Population
A remarkable increase in the po pul ation can increase demand
signif icantly, wh ich ultimatel y resul ts in raising prices of product ,
to attain equil ibrium .
11.
Inflation, Sectarian
I t is caused when a sector or industry increases it s price l evel s wit h
a fairl y l arger effect on the economy.
12.
Foreign Trade Induced Inflation
Infl ation induced due to foreign trade, can be further cl assif ie d
into two categories.
a) Export Boom Inflati on
I t can result due to the increase in exports wh ich cause shortage s
for domestic consumpt ion . I t ul timatel y resul ts in the abrupt
increase in the prices.
b) Import Price Hi ke Inflati on
If the prices in domest ic markets increase due to the infl ation in
the foreign markets, as a resul t of import s it is I mport Price Hike
Infl ations.
2.
Factors of Inflation
Every type of inflation by their causes can be general ized into two
broad categories.
1. Cost Push Inflation
I t is due to the increase in cost of producing goods and serv ice s
which results in sign if icant increase in the prices. When the price s
of goods and service s rises as a responses to the increase in the
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producing co st s, when busine sses aim to maintain the prof it
marg ins, co st push effect occurs. Fol l owing are few reasons for
cost push factor.
a) Cost of the Components/Raw Materi als
Cost of Components/Raw Material s, if increase in the local
exchange medium , it sign if icantl y increases the fin ished goods or
services price levels. I t can be a resul t of gl obal increase in
commodity pricing . I t can be a resul t of External Economic
Shocks, due to unexpected vol atil ity of prices of internat ional l y
traded commodit ie s, wh ich can be impo rted from the
internat ional market .
b) Cost of Labor
Cost of Labor generally increases if the level of unemployment is
signif icantly low, which leads to im bal ance between the increase
in wages and increase in product iv ity, due to the high bidding fo r
pay . Normal l y Labor bid h igh in fear of infl ation due t o
unempl oyment and to protect their real in come. I t can be a
persistent problem for industrie s if t hey are l abor intensive. These
indust ries ultim ately pass on the ir cost to the end consumers, by
increasing the price s.
c) Imposition of indi rect taxes
The burden of I ndirect taxes, im posed by the government on the
producers, is passed on to the customers, by increasing the prices .
This h ighly depends upon the price el asticity of demand an d
supply.
d) Exchange Rate
The changes in exchange rates, de val uat ion of currency resul ts in
the increase of the cost of goods imported. This can cause a
signif icant in crease in the prices of imported goods o r the goods
produces w ith importe d goods.
2. Demand Pull Inflation
I t is cause d due to imbalance bet ween aggregate demand and
aggregate supply and that cause s acute rise in the prices of
goods and services.
Sign if icant reason behind th is f actor is f ul l empl oyment of
resources, which leads to the increase in aggregate demand.
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There are several reasons causing increase in aggregate demand
in the economy which are as fol l ows.
a) Exchange rate
The depreciat ion of Ex change rate can be a consequence of the
reduct ion in the price of the export goods w ith respect to the
price in creasing price of the impo rt goods. Aggregate deman d
with in the economy may increase due to the shortage as there i s
more emphasis on exports, as foreign buyers wil l demand more
due to the decrease in the price in terms of their currency . Th is
can result in inflations w ith in the economy due to shortage. I f the
economy is employ ing full resources then the prices w il l increase .
b) Di rect/i ndi rect taxati on
Reduct ion in direct taxes in creases real disposal of income , which
can cause a signif icant in crease in aggregate demand, as the
room to buy more , w ith in the inco mes may in crease , and cause
Demand pull . But if there is a reduct ion in indirect taxes, the
prices of consumer goods, w il l decrease and then create the
same scenario , of increasing real disposal of income, creat ing
increase in aggregate demand.
c) Money supply
There can be monetary reasons as well , which can cause infl ation .
These can be caused due to e xcessive suppl y of money in
circul at ion, wh ich is more than the requirements of financing the
transact ions.
d) Government Spending
Higher government spending can incur f iscal deficit s and require
borrowing from the central back, which ul tim atel y increases the
infl ux on money supply into the circul ar fl ow, which can cause an
increase in the demand generated by both the Government and
from the Governed due to the incre ase in money suppl y.
e ) Interest Rate s
A drast ic de crease in interest rates can drive excessive demand ,
as the t rend from investments in banks w il l shift to investments in
commodit ie s or even in disposal .
f ) Economic growth
Fast e conomic growth can cause increase in exports, wh ich can
generate a demand pull for constit uents of the goods exported.
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Research Methodol ogy
g ) Improved busi ness confi dence
Consumer preferences and l oyal ty, prompt s business to increase
their prices and earn higher prof it m argin s.
3.
Combined effect
To accomplish the subject thesis, t hat is the invest igat ion of the
combined effect of Cost push and demand pul l factor, and t o
narrow down the research to be concl usive, for cost push I have
considered changes in exchange rate and for demand pull
changes in Government Expenditure, whereas for Infl ation I used
CPI rate of change.
Research Methodology
Fol l owing is the research methodology I used to invest igate and
concl ude my research.
1.
Hypothesis
The Hypothesis of th is re search is as follows
H0: I nfl ation is a combined effect of Cost Push and Demand Pul l
factor
H1: I nfl ation is not a combined effect of Cost Push and Deman d
Pull factor
2.
Theoretical Framework
To invest igate the subje ct of the t hesis I have sel ected the data
from FY ’01 to FY ’10. This perio d have I nfl ation rate on the basis of
CPI , Changes in Total Government Expendit ures, and changes in
the Exchange Rate, where I have considered I nfl ation Rate on the
Basis of CPI as dependent Variabl e ‘Y ’ on which we are
invest igat ion the effect of Changes in Total Government
Expendit ures, and changes in the E xchange Rate as in dependent
Variabl e ‘X1’ and ‘X2’ respectivel y. The independent variabl e are
driven from non – Devel opment expenditure and average
Exchange Rate for respect ive years
3.
Technique
To draw con clusion from th is study , I have conducted a subject ive
analysis, year by year. For Trend anal ysis I used Excel , to identif y
By Ad eel A. Si d d i qu i (2010 – 1 – 27 – 11262)
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I n fl a ti on i s a Co mb in e effect o f Dema n d Pu l l an d Co st Pu sh Fa cto r s
Data S ubject ive Anal ysis
the l agging and leading rel at ionsh ip. For empirical test ing I used
SPSS Primarily to see the correl ation which is to eval uate the
extent of relationsh ip between variabl es, covariance which is to
eval uate how they change together, and Regression anal ysis, t o
eval uate the sign if icance of each independent Variabl e, etc. The
secondary test ing technique I used is to f ind the combine effect
of both independent variabl es on I nfl ation, is two way ANOV A
without Replacement.
Fol l owing is the data set for the invest igat ion .
T ab l e 1: D at a S et
Years
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Inflation rate
G. Exp Change
Ex. Rate Change
4.41%
-4.50%
4.24%
3.54%
33.99%
3.55%
3.10%
-9.23%
-8.14%
4.57%
4.33%
-3.09%
9.27%
11.41%
6.66%
7.92%
19.52%
1.02%
7.77%
14.05%
1.15%
12.00%
40.76%
3.95%
20.77%
9.41%
32.41%
11.73%
22.63%
6.75%
Data Subjective Analysis
Init ial l y, there is a brief anal ysis on the date of each Fiscal Y ear,
with considering the other factor precisel y.
1.
FY ‘01
During the f iscal year general inflat ion rate was abo ut 4 .41% in
disparity to the inflationary rate during l ate 90s that was in do uble
figures.
The Total Government Expenditure has been decreased by 4.5% ,
whil e the exchange rate depreciat ed by 4.24% of the average of
the last Fiscal Year
2.
FY ‘02
During the fiscal year inflation rate reduced by 0.9% , bring it down
to 3.54% , whereas the total government expenditure increased by
By Ad eel A. Si d d i qu i (2010 – 1 – 27 – 11262)
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I n fl a ti on i s a Co mb in e effect o f Dema n d Pu l l an d Co st Pu sh Fa cto r s
Data S ubject ive Anal ysis
34%. Th is shows that during that period the monetary pol icy was
very strong in controlling the money suppl y.
There is a subst ant ial increase in the exchange rate, which i s
3.55% , l ower than what was witnessed during l ast f iscal year.
3.
FY ‘03
During the fiscal year inflation rate reduced more by 0.4% , bring it
down to 3.1% , whereas the total government expenditure al so
decreased by 9 .23%. Th is year t he exchange rate was al so
appreciated by 8 .14% .
4.
FY ‘04
During the fiscal year inflation rat e increased by 1.5% , which is
4.57% , whereas the government Non – devel opment expenditure
increased by 4.33% . This year the exchange rate was appreciated
by 3%.
GDP growth was sign if icantl y remarkabl e this year, which must
have lead to the inflation rate increase. Another import ant facto r
of increase in I nflation rate can be the increase in Total
Government Expenditure.
5.
FY ‘05
During th is year, inflation rate increased by 5% , which is 9 .27% ,
rel ativel y higher than the dat e from previo us years in
considerat ion, whereas the government expendit ure increased by
11.41%. Th is year the exchange rate was bro ught down by 6.66% .
The main reason for the substant ial increase in infl ation rate was
due to the increase in the aggregate demand and due to the
natural calam it ies. The product ion s of several commodit ie s were
insuff icient to sat isfy the aggregate demand.
6.
FY ‘06
During the f iscal year, inflat ion rat e decreased by 1 .5% , wh ich i s
7.92% , whereas the government expendit ure increased by 19.52% .
This year the currency was depreciated by 1.02% .
By effective monetary policy , it was possibl e to control aggregate
demand and control inflation this y ear.
By Ad eel A. Si d d i qu i (2010 – 1 – 27 – 11262)
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I n fl a ti on i s a Co mb in e effect o f Dema n d Pu l l an d Co st Pu sh Fa cto r s
Data S ubject ive Anal ysis
7.
FY ‘07
The infl ation rate during th is year was abo ut 7 .77% as compare d
to the previous year inflation rate th at was 7 .92% .
This year the government expenditure in creased by 14.05% an d
the currency was depreciated by 1 .15%.
8.
FY ‘08
The infl ation rate during this year was pushed into doubl e dig its ,
which was 12% as compared to t he previous year infl at ion rate
that was 7 .77%. Th is is al most do ubl ed.
This year the government expenditure in creased by 40.76% an d
the currency was depreciated by 3 .95%.
This was mainly because of the
during l ast year which resul ted
finance deficit s, along with weak
considered that it was al so a
internat ional market .
9.
heavy government expendit ure
into government borrowing to
monetary pol icy . I t can al so be
resul t of the infl ation in the
FY ‘09
The infl ation rate during this year w as the highest w ith in the perio d
under considerat ion , which was 20.77% as compared to the
previo us year inflat ion rate that was 12%.
This year the government expendit ure increase was control l ed to
9.41% by depreciat ing the currency to the l owest level of 32.41%.
10.
FY ‘10
The infl at ion rate during th is year re mained in do ubl e dig its, wh ich
was 11.73% as com pared to the previous year infl ation rate has
substant ially decreased but th is is rel ativel y higher with SPI and
WPI taken into considerat ion.
The increase in the inflat ionary rat e was due to price increase in
electricity , other ut il ity t ariff and fuel . The government borrowing s
for finance non – development non-product ive expendit ures, too k
the total expenditure up by 22.63 %, as prov ided by the State
Bank.
By Ad eel A. Si d d i qu i (2010 – 1 – 27 – 11262)
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I n fl a ti on i s a Co mb in e effect o f Dema n d Pu l l an d Co st Pu sh Fa cto r s
Empirical Test ing
There can be another factor causing infl ation , and that is the
substant ial increase in salaries of government empl oyees that
increased the ir purchasing power instead.
Empirical Testing
Fol l owing are few empirical tests conducted in order to
understan d the behavior of the variabl e with respect ot each
other.
1.
Correlation Testing
The Correlation analysis done on SPSS produced the foll owing
table
T ab l e 2: C or r el a ti on
Inflation rate
G. Exp Change
Ex. Rate Change
Inflation rate
1
0.262783
0.883638
G. Exp Change
1
0.134602
Ex. Rate Change
1
Interpretation
The above table shows that there is a very strong correl at ion
between Inflation Rate and Change in Exchange Rate which i s
88.36% while the correlation between Infl ation and Government
Expendit ure is 26 .27% , wh ich is signif icantl y l ow, but is no t
negl igible. The weak correlat ion can be a re sul t of the im pl icat ion
from monetary controls during the periods.
2.
Covariance
The Covarian ce analysis done on SPSS generated the foll owing
results.
T ab l e 3: C ovar i an ce
Inflation rate
G. Exp Change
Ex. Rate Change
Inflation rate
0.002606
0.002
0.004576
G. Exp Change
By Ad eel A. Si d d i qu i (2010 – 1 – 27 – 11262)
0.022234
0.002036
Ex. Rate Change
0.010293
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I n fl a ti on i s a Co mb in e effect o f Dema n d Pu l l an d Co st Pu sh Fa cto r s
Empirical Test ing
Interpretation
The above table shows that the behavior of Exchange rate
changes is sim ilar but h ighl y variabl e with infl ation rate , by
showing covariance 0 .45%, whereas the covariance between
Infl ation rate and Government Expendit ure shows sim il ar changing
behavior throughout the perio d.
3.
•
Regression
The regression analysis done on SPSS generated the fol lowing
resul ts for I nflation due to Government Expenditure.
T ab l e 4: R eg r es s i on - In f l ati on d u e to G . E xp Ch an g e
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
ANOVA
Regression
Residual
Total
Intercept
G. Exp
Change
df
1
8
9
Coefficients
0.072276
0.089966
SS
0.0018
0.02426
0.02606
MS
0.0018
0.003033
0.262783
0.069055
-0.04731
0.055068
10
F
0.59342
Significance F
0.463239
Standard Error
0.024078
t Stat
3.00178
P-value
0.017025
0.116788
0.770338
0.463239
Interpretation
In the result from regression anal ysis, change in Government
Expendit ure shows a leading effect on I nfl ation. The t-stat ist ic is
less than 2 which shows that the regression is insign if icant , th is
impl icat ion is due to the effect of certain other variabl e affect ing
infl ation are m issing in the theoretical model . The Adjusted R
Square shows that there are o ther variabl es absorbing it s
corresponding effect on infl at ion. There is a po ssibil ity that the
variabl es are not normall y distributed. The Sum of Square d
Residual can be interpreted that there are other factors w ith
signif icantly higher level of affect on determining infl at ion. The
By Ad eel A. Si d d i qu i (2010 – 1 – 27 – 11262)
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I n fl a ti on i s a Co mb in e effect o f Dema n d Pu l l an d Co st Pu sh Fa cto r s
Empirical Test ing
compl ete theoretical model must consist of every variabl e, in
order to draw the complete picture.
•
The regression analysis done bel ow on SPSS generated the
following results for Infl ation due to Exchange Rate changes.
T ab l e 5: R eg r es s i on - In f l ati on d u e to E x. R ate C h an g e
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
ANOVA
Regression
Residual
Total
Intercept
Ex. Rate
Change
df
1
8
9
Coefficients
0.063526
0.444624
SS
0.020348
0.005712
0.02606
MS
0.020348
0.000714
0.883638
0.780817
0.753419
0.026721
10
F
28.49913
Significance F
0.000695
Standard Error
0.009365
t Stat
6.783191
P-value
0.00014
0.083287
5.338458
0.000695
Interpretation
In the result from regression anal ysis, change in Exchange Rate
shows a synchronized behavior w ith I nfl ation. The t-stat ist ic is
greater than 2 which show that the regression is sign if icant , this
impl icat ion is due to the 88% correl ation between I nfl ation and
changes in exchange rate . The Mul tipl e R is 88% can be
interpreted that 11% of the effect on infl ation is due to certain
other variable which are missing in the theoretical model . There is
a possibil ity that the variabl es are not normall y dist ributed. The
Sum of Squared Re sidual can be in terpreted that there are other
factors w ith relat ively lower l evel of affect, rather smoothening
effect on determin ing inflation . The compl ete theoretical model
must con sist of every variabl e, in order to draw the compl ete
pict ure.
By Ad eel A. Si d d i qu i (2010 – 1 – 27 – 11262)
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I n fl a ti on i s a Co mb in e effect o f Dema n d Pu l l an d Co st Pu sh Fa cto r s
Trend An al ysis
4.
Two Way ANOVA Test
The two ways ANOV A done on SPSS, for the purpose to invest ig ate
the combined or concurrent effect of independent variabl es on
infl ation , generated the following resul ts
T ab l e 6: T wo W ay A N O V A T es t
ANOVA: Two-Factor Without Replication
SUMMARY
Count
Sum
0.04409329
2 -0.00263
0.0354
2 0.375404
0.031002511
2 -0.17369
0.045714286
2 0.012432
0.092717012
2 0.180637
0.07919331
2 0.205328
0.077711942
2 0.152052
0.120039473
2 0.447133
0.207677785
2 0.418179
0.117300677
2 0.293791
G. Exp Change
Ex. Rate Change
ANOVA
Source of Variation
Rows
Columns
Error
Total
SS
0.182995
0.044075
0.142271
df
9
1
9
0.36934
19
Average
-0.00131
0.187702
-0.08684
0.006216
0.090318
0.102664
0.076026
0.223567
0.20909
0.146896
Variance
0.003821
0.046337
5.92E-05
0.002758
0.001128
0.017112
0.00832
0.067762
0.026439
0.012611
10 1.423761 0.142376
10 0.48488 0.048488
0.024704
0.011437
MS
0.020333
0.044075
0.015808
F
1.286246
2.788162
P-value
0.356884
0.129303
F crit
3.178893
5.117355
Interpretation
The Sum of Square Residual sho ws that the two independent
variabl e, are 18% concurrent with each other, whil e in col umns
they are not normally distributed, and their combined effect on
Infl ation is 36.9% , which is due to the absence of other variabl es
with in the framework. I have onl y taken onl y one factor for each
of the Cost Push and Demand Pul l Factors.
Trend Analysis
For Trend Analysis I have generated the trend on Excel .
By Ad eel A. Si d d i qu i (2010 – 1 – 27 – 11262)
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I n fl a ti on i s a Co mb in e effect o f Dema n d Pu l l an d Co st Pu sh Fa cto r s
Results
Trends
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
-10.00%
-20.00%
Inflation rate
G. Exp Change
Ex. Rate Change
Fi g u r e 1: T r en d C om p ar i s on
Interpretation
After analyzing the Trend, we can see that there the exchange
rate concurrently effect the rate of infl ation , in a po sit ive manner,
whil e Government expendit ure has a l im ited but l eading effect on
infl ation .
Results
Fol l owing are the resul ts drawn from the study .
1. According to this st udy , we can say with 95% confidence
that I nflation is not a combine e ffect of Cost push and
demand pul l factors, as the two independent variabl es onl y
have 36% concurrent effect on Infl ation .
2. The study shows that due to the absence of several other
variables, the hypothesis cannot be concl usive with 95%
l evel of confidence.
By Ad eel A. Si d d i qu i (2010 – 1 – 27 – 11262)
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I n fl a ti on i s a Co mb in e effect o f Dema n d Pu l l an d Co st Pu sh Fa cto r s
Concl usions
Conclusions
We can draw following concl usions from the study .
1. Exchange Rate as a singl e Independent Variabl e can
determine the rate of infl at ion
2. Changes in Government Expenditure have a l eading effect
on I nflation, but this effect can be neutral ized by effect ive
monetary policies.
3. In combinat ion if all cost push and demand pul l factors are
considered to generate a concurrent effect on infl ation, we
can get an exact picture.
4. The improvements in effect iveness of Monetary Pol icy can
remarkable help the government in controll ing I nfl ation up
to some extent.
5. SBP’s complete control over monetary pol icy is v ital to
ach ieve this m acroe conomic goal .
6. Government Expendit ure effect on infl ation can be
neutralized by monetary control s, but th is can resul t in
reduct ion in the rate of Econom ic G rowth.
This research is left open to be invest igated w ith other variabl es
with in Cost Push and Demand P ul l Factors.
Works Cited & References
Peña, B. M. (2008 ). Inflation Determi nants in Paraguay: Cost Push
versus Demand Pul l Factors. Brookl yn, NY : Mart in Cerisol a.
Sal vatore, D. (2001 ). Princi ples of Macroeconomi cs. S ingapore :
Addison-Wesley Educat ional Publ ishers I nc.
State
Bank
of
Paki stan .
http://www.sbp.o rg.pk/ .
Pakistan
Bureau
of
http://www.pbs.gov .pk/ .
Stati sti cs.
By Ad eel A. Si d d i qu i (2010 – 1 – 27 – 11262)
(n .d.).
(n .d.).
Retrieved
Retrieved
from
fro m
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