The wrong and right kind of inflation

I like this article about the wrong kind of inflation by Roger Bootle

Or as his cleaner said:

“It’s not the inflation they need to sort out, Mr Bootle, it’s the rising prices!”

Essentially, the wrong kind of inflation is  cost-push inflation. This inflation is due to rising costs of production, such as rising energy prices, rising transport costs, imported inflation and rising food prices. This inflation causes a shift to the left of short run aggregate supply. A simple SRAS / AD diagram shows how this kind of inflation also causes a fall in real GDP.

The wrong kind of inflation

Cost push inflation, causing rising prices and falling real GDP.  (note some textbooks may show SRAS as a straight-line, but the principle is the same)

This wrong kind of inflation leads to a fall in living standards.  Since 2008, the UK has seen a fall in real wages. We have had the worst of both worlds – rising prices, but falling incomes (or at least stagnant incomes)

This bad type of inflation doesn’t cause a rise in wages. But, a fall in real wages. We may laugh at Mrs Bootle’s cleaner, but in a way she might be trying to say, inflation isn’t a problem, if money wages keep up. If money wages grow faster than inflation, then we can afford the rising prices. Our income has increased to meet the higher cost of living.

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Economic Problems Facing Pakistan

Readers Question: In this era, Inflation had gotten really high specially in countries like Pakistan. Hows will the Inflation level go down ? or will it even let the country develop ?
Inflation is one of the several problems that the Pakistan economy faces. The good news is that inflation has been falling in the past two years. But, it is still one of the highest in the region; and in addition to inflation, there are also other inter-related problems the Pakistani economy faces.

Pakistan has a forecast of real GDP growth of 3.25% in 2013 – but, given the rise in the population, this growth is insufficient to improve living standards. Real GDP per capita growth has been stagnant in recent years. (real GDP per capita – measures output per person)

 Inflation in Pakistan

Inflation peaked at 20% in 2009 and has now fallen to just under 7% at the end of 2012. However, many expect inflation to increase back up above 10% – because of cost-push factors.


Causes of Inflation in Pakistan include:

  • Rising energy prices.
  • Rising food prices. Agriculture is one of the mainstays of the Pakistan economy with 45% of the labour force employed in agriculture. However, the country has faced food shortages, pushing up food prices.

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