Inflation

INFLATION AND IT’S CONTROL

GROUP 7

Ms.Natasha Vyland 67Mr.Pratik Saraiya 77Mr.Sandip Kadam 87Ms.Shruti Shetty 97Mr.Tausif Shaikh 107Mr.Zaid Ansari 117

Session Plan 1] What is Inflation?2] 3 Strains of Inflation3]How it is measured?4]CPI vs WPI5] Deflation vs. Disinflation6]Classification of Inflation based on its sources7] Short run Philips Curve8] Causes of inflation9] Effects of inflation on Economy a) Positives of Inflation b) Negatives of Inflation 10] How to control Inflation?

“As Inflation proceeds & the real value of the currency fluctuates wildly from month to month, all permanent relations between debaters and creditors, which forms the ultimate foundation of the capitalism, becomes so utterly disordered as to be almost meaningless;& the process of wealth getting degenerates into game and lottery.”

-J.M. Keynes

Inflation is a state in which the value of money is falling i.e. price are rising.”

Inflation denotes rise in general level of prices.

Inflation is the increase in the supply of money and credit.

The word "inflation" originally applied solely to the quantity of money. To use it to mean "a rise in prices" is to deflect attention away from the real cause of inflation and the real cure for it.

LAW OF INFLATION:WHATEVER GOES UP WILL GO UP SOME MORE.

Price Index: Measure of the Avg. level of Prices

Rate of Inflation: Rate of change of general price level

Price Level: Weighted avg. of prices of the different goods and services in economy

1]CPI Method (Consumer Price Index)

2]WPI method(Wholesale Price Index)

3] PPI method(Producer Price Index)

IR= PI for a certain year - PI for a comparative year X 100

PI for a comparative year

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market.

a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers.

It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

Producer Price Index: It measures the level of prices at the wholesale or producer stage.

It is based on approx. 3400 commodity prices, including prices of foods ,manufacturing products and mining products.

Because of its great detail this index is widely used by businesses.

1. WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level.

2. More than 100 out of the 435 commodities included in the Index are not consumed by Consumer

3. WPI is supposed to measure impact of prices on business. But we use it to measure the impact on consumers.

4. Service sector plays a key role in Indian economy. Consumers are spending loads of money on services like education and health. And these services are not incorporated in calculation of WPI.

1. There are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.

2. Officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers.

3. The WPI is published on a weekly basis and the CPI, on a monthly basis. And in India, inflation is calculated on a weekly basis(Thursday).

1]Low Inflation: Single digit annual inflation rates(most industrial Countries)

2]Galloping Inflation: Double digit or triple digit inflation rates(Countries suffering from weak govt. or war)

3]Hyper Inflation: Prices are rising million or trillion percent per year.(go with money in basket and come with food in pockets)

INFLATION IS A TAXTION WITHOUT LEGISLTION.

INFLATION IS SIN ; EVERY GOVT.

DENOUNCES IT & EVERY GOVT. COMMITS IT.

INFLATION IS THE EVERYONE’S ILLUSION OF WEALTH.

GOVT. IS THE ONLY INSTITUTION THAT CAN TAKE A VALUABLE COMMODITY LIKE PAPER AND MAKE IT WORTHLESS BY APPLYING INK TO IT.

A general decline in price often caused by a reduction in the supply of money or credit.

Deflation can be caused also by decrease In government , personal or investment spending.

Deflation has the side effect of increased unemployment.

A reduction in the rate of inflation

1] Inertial Inflation: In Industrial economies Inflation has great momentum and tend to persists at the same rate.

2] Demand Pull Inflation: Rapid Money-supply growth increases demand which in turn increases the price level.(Too much money chases too few goods)

3] Cost- Push inflation( Supply Shock Inflation): Inflation resulting from rising costs during periods of high unemployment and slack resource utilization.

Increase in money Supply High demand for primary articles Surging global oil price hike Global Economic Fluctuations Future Trading of necessity goods Rising Imported raw materials A depreciation in the Exchange

rate Rapid growth of Money Supply Increasing the rate of growth of

real estate prices Deficit Financing Black Money

EFFECTS OF INFLATION ON THE ECONOMY:

•They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term.

•Uncertainty about the future purchasing power of money discourages investment and saving.

•Our fixed income gets depleted & we find ourselves having to survive on even less.

EFFECTS OF INFLATION(NEGATIVE):

There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.Higher income tax rates. Inflation rate in the economy is higher than rates in other countries; this will increase imports and reduce exports, leading to a deficit in the balance of trade.

EFFECTS OF INFLATION(NEGATIVE):

EFFECTS OF INFLATION(NEGATIVE):Inflation affects you directly when you go to

the grocery store but find that a hundred dollars doesn't get you the same amount as it did last year.

Creditors (or savers) are hurt by inflation, but debtors (or borrowers) are helped by inflation.

Inflation redistributes real income from some people to others.

Some demand-pull inflation encourages firms to increase production in anticipation of receiving a higher price for the output sold. This contributes to employment and investment.

Inflation encourages firms to seek more efficient methods of production. This increases the production possibility frontier for the economy

A]Monetary Measures

1)Credit Control

2)Demonetization of Currency

3)Issue of New Currency

B] FISCAL Measures

1)Reduction in Unnecessary Expenditure

2)Increase in Taxes

3)Increase in Savings

4) Surplus Budgets

5) Public Debt

C] Other Measures

1)To Increase Production

2) Rational Wage Policy

3) Price Control

4) Rationing

Group 7