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Abstract
Inflation has a significant impact on the economy of every country, developed as well as developing, the latter in particular. Rising inflation in Pakistan is one of the biggest challenges for economic development, which has risen from 5.736 in 2000 to 20.77 in 2010 (World Economic Outlook, IMF, April 2011:155). Moreover, the post-9/11 scenario, the 2005 earthquake and the heavy floods of 2010 witnessed a significant increase in foreign grants and aids that pushed the inflation further up because of increased liquidity in the consumption market. To find whether inflation in Pakistan was cost-push or demand-pull, we used the regression model and time-series data from the last twenty years (1990-2010). This paper presents an analysis of both types of inflations by testing and verifying Wage Rate (WR), Government Expenditures (GE), Exports (Exp) and Interest Rate (IR) for cost-push inflation; and Money Supply (MS), Net Foreign Aids (NFA), Imports (Imp), Net Foreign Grants (NFG) and Interest Rate (IR) for demand-pull inflation. Empirical results suggest that Pakistan is experiencing demand-pull inflation (rather than cost-push) which points to interest rate, money supply, net foreign aid and grants (except money supply) as significant causal factors, explaining approximately 43.74% of the inflation in Pakistan.
Keywords. Cost-push Inflation, Demand-pull Inflation
Introduction
One of the biggest economic challenges confronting the whole world in general and Pakistan, in particular, is rising inflation. Economists generally define inflation as the increase in the prices of goods and amenities or loss in a currency's acquiring command. A thorough investigation of the causes of inflation reveals two main reasons for inflation: the rise in the production cost of goods or increase in the demand of goods. Inflation due to increase in the production cost is defined as "Cost-push Inflation" while inflation because of increased demand for goods is defined as "Demand-pull Inflation." Although Pakistan, an underdeveloped economy, has undergone a noteworthy economic growth in the last few years, fundamental hurdles in the way of economic development are still unresolved of which inflation remains the biggest of all those issues.
The last five years have contributed a lot in the rise of this issue due to the expansionary monetary policy of the State Bank of Pakistan and some dramatic changes in international oil prices. High...