Causes and Consequences of High Inflation Chapter 11: Causes and Consequences of High Inflation Pakistan today is experiencing one of the highest rates of inflation in its 75-year history. It is current operating at close to 25 percent on a year-to-year basis. The last time there was such high rate of inflation was in 1973-74 when it approached 30 percent in the immediate aftermath of the quantum devaluation of the rupee by 60 percent. The objectives of this chapter are, first, to highlight both the long-term and the short­term trends of inflation in Pakistan. Second, based on econometric analysis since 1991, the quantitative contribution of different factors to inflation is determined. Third, the consequences of inflation on living standards of households in different income quintiles are identified. In the fourth section, estimates are given of the inflationary impact on various macroeconomic variables. Finally, in the last section an attempt is made to project the outlook for inflation in Pakistan. 11.1 Trends in the Rate of Inflation The long-term trend in the rate of inflation is presented in Figure 11.1. After the double­digit inflation of 13 percent in the decade of the 70s, it has remained in the range of 6 percent to 9 percent in subsequent decades up to 2020. The lowest rate of inflation of 6.7 percent was witnessed in the decade of the 80s. Over the fifty years, 1970 to 2020, the average rate of inflation in Pakistan has been 8.7 percent. Figure 11.1: Average Decade wise Rate of Inflation in Pakistan (%) Source: PBS 107