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INTRODUCTION CONSUMER PRICE INDEX:A consumer price index (CPI) is an index number measuring the average price of consumer

goods and services purchased by households. The percent change in the CPI is a measure of inflation. The CPI is, along with the population census and the National Income and Product Accounts, one of the most closely watched national economic statistics

INFLATION:The rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling. Inflation's effects on an economy are various and can be simultaneously positive and negative.

HOW INFLATION IS MEASURED?


Inflation is normally given as a percentage and generally in years or in some instances quarterly and is derived from the Consumer Price Index (CPI).However, there are two main indices used to measure inflation. The first is the Consumer Price Index, or the CPI. The CPI is a measure of the price of a set group of goods and services. The bundle" as the group is known contains items such as food, clothing, gasoline and even computers. The second measure of inflation is the Producer Price Index, or the PPI. While the CPI indicates the change in the purchasing power of a consumer, the PPI measures the change in the purchasing power of the producers of those goods. . The PPI measures how much producers of products are getting on the wholesale level, i.e. the price at which a good is sold to other businesses before the good is sold to a consumer. The method which is following in this report is based on the inflation rate, month over month bases which we have calculated through month over month CPI.

CAUSES OF INFLATION:
Inflation comes in different forms and those at are familiar with the economic matters would observe that there are trends in the way that prices are moving gradual and irregular in relation to aggregate sections of the economy. This suggest that there is more than one factor that causes inflation and as different sections of the economy develop it gives rise to different types inflationary periods.

EFFECT OF INFLATION:
Inflation can have positive and negative effects on an economy. Negative effects of inflation include loss in stability in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include a improvement of economic recessions, and debt relief by reducing the real level of debt. 1. Hoarding (people will try to get rid of cash before it is devalued, by hoarding food and other commodities creating shortages of the hoarded objects). 2. Distortion of relative prices (usually the prices of goods go higher, especially the prices of commodities). 3. Increased risk - Higher uncertainties (uncertainties in business always exist, but with inflation risks are very high, because of the instability of prices). 4. Existing creditors will be hurt (because the value of the money they will receive from their borrowers later will be lower than the money they gave before). 5. Increased consumption ratio at the early stages of inflation (people will be consuming more because money is more abundant and its value is not lowered yet). 6. Lowers national saving (when there is a high inflation, saving money would mean watching your cash decrease in value day after day, so people tend to spend the cash on something else). 7. Illusions of making profits (companies will think they were making profits while in reality theyre losing money if they dont take into consideration the inflation rate when calculating profits). 8. Causes an increase in tax bracket (people will be taxed a higher percentage if their income increases following an inflation increase). 9. Causes business cycles (many companies will have to go out of business because of the losses they incurred from inflation and its effects). 10. Currency debasement (which lowers the value of a currency, and sometimes cause a new currency to be born)
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11. Rising prices of imports (if the currency is debased, then its purchasing power in the international market is lower). Positive: 1. It can benefit the inflators (those responsible for the inflation) 2. It be benefit early and first recipients of the inflated money (because the negative effects of inflation are not there yet). 3. It can benefit the cartels (it benefits big cartels, destroys small sellers, and can cause price control set by the cartels for their own benefits). 4. It might relatively benefit borrowers who will have to pay the same amount of money they borrowed (+ fixed interests), but the inflation could be higher than the interests, therefore they will be paying less money back. (example, you borrowed $1000 in 2005 with a 5% fixed interest rate and you paid it back in full in 2007, lets suppose the inflation rate for 2005, 2006 and 2007 has been 15%, you were charged %5 of interests, but in reality, you were earning %10 of interests, because 15% (inflation rate) 5% (interests) = %10 profit, which means you have paid only 70% of the real value in the 3 years. Note: Banks are aware of this problem, and when inflation rises, their interest rates might rise as well. So don't take out loans based on this information.

SIGNIFICANCE:
The study is very significant as the research would provide an in-depth answer to the question that whether inflation rate is related with time and if they are related than what is the intensity.

METHODOLOGY:
The research is being based on the time series.

DEPENDENT VARIABLE:
The dependent variable of our report is inflation rate.

INDEPENDENT VARIABLE:
The independent variable of the report is time.
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MODEL:
The model which is suggested for report is Time Series.

SAMPLE SIZE:
The sample size of the report is 87.

TIME SERIES EQUATION: Yt = +t


LAG MODEL EQUATION:

Yt = t)t-1

PROBLEM STATEMNT:
Ho: There is no significant effect of change in inflation with respect to time. H1: There is a significant effect of change in inflation with respect to time.

Analysis

Model Summary R .568 R Square .323 Adjusted R Square .315 Std. Error of the Estimate 4.242

The model summary shows that R square is 0.323 which is 32.3 percent. This 32.3 percent shows the explanatory power and that inflation rate with respect to time is 32.3% explained .and that 67.7% unexplained.

ANOVA Sum of Squares Regression Residual Total 730.463 1529.898 2260.361 df 1 85 86 Mean Square 730.463 17.999 F 40.584 Sig. .000

The Anova table shows that df is 1 which shows that we have one variable which is inflation rate. The residual df is 85 which tells that there is 87 number of observations and total is n-1 which is 86 and residual is total regression (df). The regression Mean Square which is 730.463 the difference of residual regression (sum of square). The residual mean square which is 17.999 is a ratio of residual sum of square upon df of residual. F value is 40.584 which is greater than 4 which shows that our research is significant and therefore, Ho rejected. The sig. value is less than 0.05, so it shows that our research is significant.

Coefficients Unstandardized Coefficients B Case Sequence (Constant) .115 6.413 Std. Error .018 .918 Standardized Coefficients Beta .568 t 6.371 6.989 Sig. .000 .000

Inflation rate = 6.413+0.115t T value is 6.371which is greater than 2 which show that our research is significant.

Inflation rate
30 25 20 15 10 5 0 May-04 May-05 May-06 May-07 May-08 May-09 May-10 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Jan-11 Inflation rate

LAGS (InflationRate,1)

Model Summary R .572 R Square .327 Adjusted R Square .319 Std. Error of the Estimate 4.252

The model summary shows that R square is 0.327 which is 32.7 percent. This 32.7% shows the explanatory power and that inflation rate with respect to time is 32.7% explained and that 67.3% unexplained.

ANOVA Sum of Squares Regression Residual Total 738.573 1518.828 2257.401 df 1 84 85 Mean Square 738.573 18.081 F 40.847 Sig. .000

The Anova table shows that df is 1 which shows that we have one variable which is inflation rate. The residual df is 84 which tells 86 number of observations and total is n-1 which is 86 and residual is total regression (df). The regression Mean Square which is 738.573 the difference of residual regression (sum of square). The residual mean square which is 18.081 is a ratio of residual sum of square upon df of residual. F value is 40.874 which is greater than 4 which shows that our research is significant and therefore, Ho rejected. The sig. value is less than 0.05, so it shows that our research is significant.

Coefficients Unstandardized Coefficients B Case Sequence (Constant) .118 6.217 Std. Error .018 .941 Standardized Coefficients Beta .572 t 6.391 6.605 Sig. .000 .000

Inflation rate = 6.217+0.118t T value is 6.391 which is greater than 2 which show that our research is significant.

LAGS (InflationRate,2)

Linear

Model Summary R .577 R Square .333 Adjusted R Square .324 Std. Error of the Estimate 4.259

The model summary shows that R square is 0.333 which is 33.3 percent. This 33.3% shows the explanatory power and that inflation rate with respect to time is 33.3% explained and that 66.7% unexplained.

ANOVA Sum of Squares Regression Residual Total 749.986 1505.346 2255.332 df 1 83 84 Mean Square 749.986 18.137 F 41.352 Sig. .000

The Anova table shows that df is 1 which shows that we have one variable which is inflation rate. The residual df is 84 which tells 86 number of observations and total is n-1 which is 86 and residual is total regression (df). The regression Mean Square which is 749.986 the difference of residual regression (sum of square). The residual mean square which is 18.137 is a ratio of residual sum of square upon df of residual. F value is 41.352 which is greater than 4 which shows that our research is significant and therefore, Ho rejected. The sig. value is less than 0.05, so it shows that our research is significan
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Coefficients Standardized Unstandardized Coefficients Coefficients B Case Sequence (Constant) .121 6.005 Std. Error .019 .965 Beta .577 t 6.431 6.223 Sig. .000 .000

Inflation rate = 6.005+0.121t T value is 6.431 which is greater than 2 which show that our research is significant.

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References:
http://www.statpak.gov.pk/fbs/sites/default/files/price_statistics/monthly_price_indices/mpi3/FBSInflation_March%202011.pdf http://www.finance.gov.pk/survey/chapters/07-Inflation09.pdf http://www.finance.gov.pk/survey/chapters/07-Inflation08.pdf http://www.finance.gov.pk/survey/chapters/08-Inflation.PDF

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