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INFLATION
Dr. Raj Agrawal
INFLATION
• Inflation is a rise in the general level of prices of
goods and services in an economy over a period of
time.
• The term "inflation" once referred to increases in the
money supply (monetary inflation); however, the
relationship between money supply and price levels
have led to its primary use today in describing price
inflation.
• A loss of purchasing power in the medium of
exchange.
• ONE SHALL ALWAYS INVEST MONEY & LET IT GROW.
ADVERSE EFFECTS
- Discourage investment and saving.
- Widening of real income gap.
- Shortages of goods due to hoarding.
• Economists favor a low & steady rate of inflation.
Central Banks help in doing so.
METHODS
• A Consumer Price Index (CPI) is a measure of
the average price of consumer goods and
services purchased by households.
• A Weighted Price Index (WPI) is a measure of
changes in the prices of goods at the
wholesale level, particularly those goods sold
between businesses.
TYPES OF INFLATION
•DEMAND-PULL
•COST-PUSH
•PRISING POWER
•STRUCTURALIST
DEMAND-PULL INFLATION
Occurs when the total demand for goods and services in an
economy exceeds the available supply, so the prices rise.
Causes
•Increase in Public Expenditure, Increase in Investment
DEMAND PULL INFLATION
COST PUSS INFLATION
COST PUSH INFLATION
There’s no increase in aggregate demand, price may still rise.
• Wage-push inflation
• Profit push inflation
• Increase in prices raw material
PRICING POWER INFLATION
Occurs when ever businesses in general decide to boost their
prices to increase their profit margins.
STRUCTURALIST INFLATION
The term applies whenever any of the other three factors hits a
basic industry causing inflation there, and since the industry hit
is a major supplier of many other industries, as for example
steel is, or oil is, that raises costs of the industries using say
steel or oil, and forces up prices there also, so inflation
becomes more widespread throughout the economy, although
it originated in just one basic sector.
CAUSES OF INFLATION
 Over-expansion of Money Supply
 Expansion of Bank Credit
Deficit Financing
Ordinary monetary factors
High Non-development Expenditure
Huge Plan Investment
Black Money
High Indirect Taxes
Non-Monetary Factors
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A high Population Growth
Natural Calamities and Bad Weather Conditions
Speculation and Hoarding
High Prices of Imports
Monopolies
Underutilization of Resources
 Demand-pull inflation
EFFECTS OF INFLATION
Inflation is the increase in the price of general goods and service.
it causes slow down in the economy.
Some negative effects of inflation are:
 Slowdown in consumption as well as production.
 Cost push inflation
 Hoarding
 Hyperinflation
 Shoe leather costs
 Menu costs
 Inflation erodes the real value of nominally fixed payments
Controlling Inflation
A variety of methods have been used in
attempts to control inflation.
Monetary policy
Fixed exchange rates
Wage and price controls
POLICIES ADOPTED……
FISCAL POLICY- It is defined as the policy under which the
government uses the instrument of public spending,
taxation and public borrowing.
3 instruments of fiscal policy: Taxation policy
 Public expenditure
 Public debt policy
MONETARY POLICY- Under this policy the government
controls the supply and availability of money.
Steps taken by Indian government to control
current inflation problem
• Rising inflation due to the high global price of
crude oil, was a cause of concern. “An
unprecedented situation is now being
witnessed on the price front”
• Major steps taken were liberalization of
imports, banning export and cut in excise and
custom duty.
CURRENT SCENARIO OF
INFLATION
• In India inflation is at an acceptable level.
• Off late prices of essential commodities have risen
sharply and therefore driving up the inflation rate.
• In India two types of index:
i)Consumer price index.
ii)Wholesale price index.
• Shortfall in domestic production vis-à-vis domestic
demand.
• Inflation was also accompanied by buoyant growth
of money and credit.
• While the GDP growth is zoomed to 9% per
annum,the broad money grew by more than 20%.
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