Inflation

InflationInflation 11

InflationInflationBy:-By:-

Manoj Kumar SinghManoj Kumar Singh99108450119910845011

[email protected] Institute of International Business, New DelhiFortune Institute of International Business, New Delhi


IntroductionIntroduction

Inflation generally means rise in prices.Inflation generally means rise in prices. Inflation is an increase in the price of a basket Inflation is an increase in the price of a basket

of goods and services that is representative of of goods and services that is representative of the economy as a whole.the economy as a whole.

It is a persistence and substantial rise in It is a persistence and substantial rise in general level of prices after full employment general level of prices after full employment level of output.level of output.


How India calculates Inflation ? How India calculates Inflation ?

India uses the Wholesale Price Index (WPI) to India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the calculate and then decide the inflation rate in the economy. economy.

WPI - WPI is the index that is used to measure the WPI - WPI is the index that is used to measure the change in the average price level of goods traded in change in the average price level of goods traded in wholesale market. In India, a total of 435 wholesale market. In India, a total of 435 commodities data on price level is tracked through commodities data on price level is tracked through WPI which is an indicator of movement in prices of WPI which is an indicator of movement in prices of commodities in all trade and transactions.commodities in all trade and transactions.


Types of InflationTypes of Inflation

On the Basis of Rate of Inflation:-On the Basis of Rate of Inflation:-

Creeping Inflation – Rise in the price level at Creeping Inflation – Rise in the price level at very low rate, or snail’s pace, around 2-3% per very low rate, or snail’s pace, around 2-3% per annum is referred to as Creeping Inflation or annum is referred to as Creeping Inflation or Mild Inflation.Mild Inflation.


Walking Inflation – A sustained price increase Walking Inflation – A sustained price increase from 3 to 7 or below 10% is termed as from 3 to 7 or below 10% is termed as Walking Inflation.Walking Inflation.

Running Inflation – A sustained price rise Running Inflation – A sustained price rise from 10 to 20% per annum is known as from 10 to 20% per annum is known as Running Inflation.Running Inflation.

Hyperinflation – Running Inflation if not Hyperinflation – Running Inflation if not controlled turns into Hyperinflation which is controlled turns into Hyperinflation which is also known as Galloping or Jumping Inflation.also known as Galloping or Jumping Inflation.


On the Basis of Degree of Control:-On the Basis of Degree of Control:-

Open Inflation – Continuous rise in price Open Inflation – Continuous rise in price without any interruption and control from the without any interruption and control from the government or any other authority is known as government or any other authority is known as Open Inflation.Open Inflation.

Suppressed Inflation – When price level in an Suppressed Inflation – When price level in an economy is not allowed to rise (though economy is not allowed to rise (though conditions exist for rise) through the use of conditions exist for rise) through the use of government policies like price controls and government policies like price controls and rationing, it is known as Suppressed Inflation.rationing, it is known as Suppressed Inflation.


Causes of InflationCauses of Inflation

Demand-Pull InflationDemand-Pull Inflation The inflation taking place due to demand The inflation taking place due to demand

pressures is known as Demand-Pull Inflation.pressures is known as Demand-Pull Inflation. Increase in quantity of money.Increase in quantity of money. Increase in business outlays or government Increase in business outlays or government

expenditure.expenditure. Foreign expenditure on goods and services.Foreign expenditure on goods and services.


Cost-Push InflationCost-Push Inflation

Increase in the overall price level due to cost-Increase in the overall price level due to cost-pressures is known as Cost-Push or Supply pressures is known as Cost-Push or Supply Side Inflation.Side Inflation.

Higher wage rates.Higher wage rates. Higher profit margins.Higher profit margins. Higher taxes.Higher taxes. Higher prices of Input.Higher prices of Input.


Effects of InflationEffects of Inflation

Inflation is described as ‘Enemy number one’.Inflation is described as ‘Enemy number one’. A high rate of inflation makes the life of poor A high rate of inflation makes the life of poor

miserable.miserable. High inflation adversely affects economic High inflation adversely affects economic

growth due to a number of factors : distortion growth due to a number of factors : distortion of relative prices, redistribution of wealth of relative prices, redistribution of wealth between debtors and creditors, aversion to between debtors and creditors, aversion to long-term contacts and excessive use of long-term contacts and excessive use of resources for hedging inflation risks.resources for hedging inflation risks.


Effect on Production or Economic Effect on Production or Economic Activities:-Activities:-

Adverse effect on the profitability of business Adverse effect on the profitability of business organizations.organizations.

Firms find it profitable to hold rather than Firms find it profitable to hold rather than produce to earn more profits in the future.produce to earn more profits in the future.


Effect on Distribution of Income:-Effect on Distribution of Income:-

Producers vs Consumers.Producers vs Consumers. Debtors vs Creditors.Debtors vs Creditors. Holders of fixed interest security vs Holders of fixed interest security vs

Shareholders.Shareholders. Fixed income earning class vs Profiteers.Fixed income earning class vs Profiteers. Government vs General Policies.Government vs General Policies.


Other Effects:-Other Effects:-

Uncertainty in the economic activities.Uncertainty in the economic activities. Diversion and sub-optimal utilization of Diversion and sub-optimal utilization of

resources.resources. Reduction in savings.Reduction in savings. Imbalance in the balance of payment.Imbalance in the balance of payment. Depreciation of the exchange rate.Depreciation of the exchange rate.


Control of InflationControl of Inflation

If inflation is allowed to gain a footing, it is If inflation is allowed to gain a footing, it is only likely to get out of control.only likely to get out of control.

The different policy measures are used for The different policy measures are used for controlling inflation depending upon source, controlling inflation depending upon source, causes and intensity of inflation.causes and intensity of inflation.


Monetary MeasuresMonetary Measures

Monetary measures are designed and Monetary measures are designed and implemented by the central bank of the implemented by the central bank of the country.country.

Monetary measures include quantitative and Monetary measures include quantitative and qualitative control measures that tries to qualitative control measures that tries to restrict the aggregate demand for goods and restrict the aggregate demand for goods and services in the economy by restricting the services in the economy by restricting the supply of money in the economy.supply of money in the economy.


Quantitative MeasuresQuantitative Measures

Bank RateBank Rate

Open Market Operations (OMO).Open Market Operations (OMO).

Variable Reserve Requirements.Variable Reserve Requirements.


Selective Control MeasuresSelective Control Measures

Regulating Customer Credit.Regulating Customer Credit.

Higher Margin Requirements.Higher Margin Requirements.

Directives, moral suasion, publicity and direct Directives, moral suasion, publicity and direct action.action.


Fiscal MeasuresFiscal Measures

Fiscal policies, i.e., government expenditure, taxation Fiscal policies, i.e., government expenditure, taxation and debt policies can be used to curb the inflationary and debt policies can be used to curb the inflationary pressures in an economy.pressures in an economy.

Since government spending has become an important Since government spending has become an important component of the aggregate spending to almost all component of the aggregate spending to almost all countries – developed and underdeveloped – by countries – developed and underdeveloped – by changing its expenditure in relation to the tax changing its expenditure in relation to the tax receipts, the government can exert a powerful effect receipts, the government can exert a powerful effect on the flow of money, aggregate demand and on the flow of money, aggregate demand and economic activity.economic activity.


Thank You

Inflation

Documents