RISING INFLATION:

Inflation has plunged countries into long periods of instability. Central bankers often aspire to be known as “inflation hawks.” Politicians have won elections with promises to combat inflation, only to lose power after failing to do so. 

In reality, prices change at different paces. Some, such as the prices of traded commodities, change every day; others, such as wages established by contracts, take longer to adjust (or are “sticky,” in economic parlance). In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation.

Pakistan witnessed highest inflation not only in comparison with the developed economies but also with emerging economies,” said the Inflation Monitor for April issued by the State Bank of Pakistan (SBP).

The SBP pushed up interest rates to cool down the inflationary pressure during the fiscal year but high rates proved counterproductive as they further increased inflation while the private sector stopped borrowing costly money hampering industrial growth and services.

However, with the emergence of corona virus, the entire economic scenario was turned upside down as demand contraction lowered inflation forcing the SBP to cut down interest rates to 5.25 pc within just three months. The number is expected to drop further in June. Cost of food in Pakistan increased 6.70 percent in January of 2021 over the same month in the previous year.

Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates. Take pensioners who receive a fixed 5 percent yearly increase to their pension. If inflation is higher than 5 percent, a pensioner’s purchasing power falls. On the other hand, a borrower who pays a fixed-rate mortgage of 5 percent would benefit from 5 percent inflation, because the real interest rate (the nominal rate minus the inflation rate) would be zero; servicing this debt would be even easier if inflation were higher, as long as the borrower’s income keeps up with inflation. The lender’s real income, of course, suffers.