State Bank of Pakistan (SBP) has just issued its Monetary Policy Statement, according to inflation in Pakistan has risen from 1.6 to 4.5% in October 2016. State Bank has associated the increase in Inflation with the direct growth in the domestic demand and also declining impact of changes in oil prices. SBP has also decided to keep the rate of interest at 5.45 percent assuming that
CPI (Consumer Price Index) is used to measure the state of inflation. So, an increase in inflation just means that consumer confidence has boosted which has resulted in an increase in commodity prices. According to the Institute, same results are presented in the IBA-SBP November 2016 survey.
No doubt that such condition is good for the economy where an increase in consumer demand means a need for products and services that prompt manufacturers to increase supply. If credit investments in private sector perform good, then for sure there is going to be a boost in overall economic condition.
The issue is that rise in inflation is not merely associated with CPI. At times heavy reliance on imports also leads to the increased inflation as more it costs more to purchase goods and services from overseas. So, explanation of the rise in inflation due to growth in consumer demand is never sufficient to explain whether the economy is performing well or not.