INFLATION

• What is inflation?
• Measurement of inflation
• Ty p e s o f i n f l a t i o n
• Causes and effects of inflation
• Inflation in India
 W H AT I S I N F L AT I O N ?
In economics, inflation
is a sustained increase
in the general price
level of goods and
services in an economy
over a period of time.
Co n s eq u en tly, in f latio n
reflects a reduction in
the purchasing power
per unit of money - a
loss of real value in the
medium of exchange and
unit of account within
th e eco n o my.

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 MEASUREMENT OF
I N F L AT I O N
Inflation rate, the
annualized percentage
change in a general
price index, usually the
consumer price index,
over time.
If the price level in the
current year is 'P1' & in
the previous year is
'Po', then inflation for
the current year is
(P1-Mon)/ Mon x 100

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 CPI & WPI
• C P I : I t i s a c o m p r e h e n s i v e
m e a s u r e u s e d f o r e s t i m a t i o n o f
p r i c e c h a n g e s i n a b a s k e t o f
g o o d s a n d s e r v i c e s
r e p r e s e n t a t i v e o f c o n s u m p t i o n
e x p e n d i t u r e i n a n e c o n o m y i s
c a l l e d c o n s u m e r p r i c e i n d e x .
T h e p e r c e n t a g e c h a n g e i n t h i s
i n d e x o v e r a p e r i o d o f t i m e
g i v e s t h e a m o u n t o f i n f l a t i o n
o v e r t h a t s p e c i f i c p e r i o d , i . e .
t h e i n c r e a s e i n p r i c e s o f a
r e p r e s e n t a t i v e b a s k e t o f g o o d s
c o n s u m e d .
• W P I : r e p r e s e n t s t h e p r i c e o f
g o o d s a t a w h o l e s a l e s t a g e
i . e . g o o d s t h a t a r e s o l d i n
b u l k a n d t r a d e d b e t w e e n
o r g a n i z a t i o n s i n s t e a d o f
c o n s u m e r s . W P I i s u s e d a s a
m e a s u r e o f i n f l a t i o n i n s o m e
e c o n o m i e s . I n f l a t i o n r a t e i s
t h e d i f f e r e n c e b e t w e e n W P I
c a l c u l a t e d a t t h e b e g i n n i n g
a n d t h e e n d o f a y e a r. T h e
p e r c e n t a g e i n c r e a s e i n W P I
o v e r a y e a r g i v e s t h e r a t e o f
i n f l a t i o n f o r t h a t y e a r.
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 OTHER WIDELY USED PRICE INDICES FOR
CALCULATING PRICE INFLATION
• Co mmo d i t y p ri ce i n d i ces : I t i s a
f i x ed - wei g h t i n d ex o r ( wei g h t ed )
av er ag e o f s el ect ed co mmo d i t y p r i ces ,
wh i ch may b e b as ed o n s p o t o r f u t u r es
p r i ces . I t meas u r es t h e p r i ce o f a
s electio n o f co mmo d ities .
• GDP d ef l a t o r : i s a meas u r e o f t h e
p r i ce o f al l t h e g o o d s an d s er v i ces
i n cl u d ed i n g r o s s d o mes t i c p r o d u ct
( GDP ) .
• As s et p ri ce i n f l a t io n : i s an u n d u e
i n cr eas e i n t h e p r i ces o f r eal o r
f in an cial as s ets , s u ch as s to ck
( eq u i t y) an d r eal es t at e .
• Co re p ri ce i n d i ces : Th e "co r e" P CE
p r i ce i n d ex i s d ef i n ed as p er s o n al
co n s u mp t i o n ex p en d i t u res ( P CE)
p r i ces ex cl u d i n g f o o d an d en erg y
p r i ces . Th e co r e P CE p r i ce i n d ex
meas u r es th e p r ices p aid b y co n s u mer s
f o r g o o d s an d s er v i ces wi t h o u t t h e
v o l at i l ity cau s ed b y mo v emen t s i n
f o o d an d en erg y p r i ces t o r ev eal
u n d er l yi n g i n f l at i on t r en d s .
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 CAUSES OF INFLATION

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 1. COST PUSH
INFLATION Causes of Cost Pull
Inflation
• Cost push inflation occurs when we
experience rising prices due to
• Rising wages
higher costs of production and higher
costs of raw materials. Cost push • Import
inflation is determined by supply
• Raw material prices and commodity
side factors. Cost-push inflation can
costs
lead to lower economic growth and
often causes a fall in living • Profit push inflation
standards, though it often proves to
• Declining productivity
be temporary.
• Higher taxes

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 DIAGRAM SHOWING
COST PUSH INFLATION

• In the diagram X-axis represents the year for

which GDP is calculated Y-axis: represents the
price level

• While S represents the Short Run Aggregate

Supply.

• Short run aggregate supply curve shifts to the

left, causing higher price level and lower real
GDP.

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 2. DEMAND PULL INFLATION

• Demand pull inflation occurs when aggregate demand is growing at an unsustainable rate leading to increased
pressure on scarce resources and a positive output gap, When there is excess demand, producers can raise their
prices and achieve bigger profit margins
• Demand-pull inflation becomes a threat when an economy has experienced a boom with GDP rising faster than
the long- run trend growth of potential GDP
• Demand-pull inflation is likely when there is full employment of resources and S is inelastic

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 CAUSES OF DEMAND PULL INFLATION
• A depreciation of the exchange rate increases the price of imports and reduces the foreign price of a
country's exports. If consumers buy fewer imports, while exports grow, AD in will rise and there may
be a multiplier effect on the level of demand and output
• Higher demand from a fiscal stimulus e.g. lower direct or indirect taxes or higher government
spending. If direct taxes are reduced, consumers have more disposable income causing demand to rise.
Higher government spending and increased borrowing creates extra demand in the circular flow
• Monetary stimulus to the economy: A fall in interest rates may stimulate too much demand-for
example in raising demand for loans or in leading to house price inflation. Monetarist economists
believe that inflation is caused by "too much money chasing too few goods" and that governments can
lose control of inflation if they allow the financialsystem to expand the money supply too quickly.
• Fast growth in other countries - providing a boost to UK exports overseas. Export sales provide an
extra flow of income and spending into the UK circular flow-so what is happening to the economic
cycles of other countries definitely affects the UK

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 CONCEPTS OF DEFLATION, DISINFLATION, REFLATION &
STAGFLATION
• Deflation - is a condition of falling prices on account of insufficient
effective demand. Results in a continuous fall in level of economic
activity & growing unemployment
• Disinflation - it is a process of lowering costs & prices when they are
excessively high. Brings down inflationary trend in prices without causing
unemployment
• Reflation - is a moderate degree of inflation that is deliberately
undertaken to relieve depression.
• Stagflation - a situation in which a high rate of inflation prevails
simultaneously with a high rate of unemployment or stagnant economic
condition. It is a combination of inflation & stagnation

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 EFFECTS OF
INFLATION

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 GENERAL EFFECT

• An increase in the general level of prices implies a decrease in the purchasing power of the currency. The effect of
inflation is not distributed evenly in the economy, and as a consequence there are hidden costs to some and
benefits to others from this decrease in the purchasing power of money.

• Effect On Redistribution Of Income:

(1) Debtors and Creditors,: debtors gain and creditors lose.
(2) Salaried Persons: lose
(3) Wage Earners: may gain or lose
(4) Fixed Income Group: lose
(5) Equity Holders or Investors: gain
(6) Businessmen: gain
(7) Agriculturists: gain or lose

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 POSITIVE EFFECT OF INFLATION

1.Deflation (a fall in prices - negative inflation) is very harmful. When prices are falling people are reluctant to
spend money because they are concerned that prices will be cheaper in the future, therefore, they keep delaying
purchases.

2. Moderate inflation enables adjustment of wages: example, it may be difficult to cut nominal wages. But, if
average wages are rising due to moderate inflation, it is easier to increase the wages of productive workers.

3. Inflation can boost growth. At times of very low inflation the economy may be stuck in a recession. Arguably
targeting a higher rate of inflation can enable a boost in economic growth. (Although this view is controversial).

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 CONTROL OF INFLATION
1. Monetary Measures: Monetary measures aim at reducing money incomes.(a) Credit Control(b) Demonetisation
of Currency(c) Issue of New Currency
2. Fiscal Measures: Fiscal measures are highly effective for controlling government expenditure, personal
consumption expenditure, and private and public investment.
(a) Reduction in Unnecessary Expenditure
(b) Increase in Taxes
(c) Increase in Savings
(d) Surplus Budgets
(e) stop repayment of public debt
3. Other Measures: are those which aim at increasing aggregate supply and reducing aggregate demand directly.
(a) Increase Production
(b) Adopt Rational Wage Policy
(c) Check Price Control
(d) Rationing

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 INFLATION IN INDIA

• In India, CPI (combined) is used for calculation of inflation.

• Current inflation in India: august 2016:- 5.30%
• In India WPI is published on a weekly basis and CPI on monthly basis.

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 THANK YOU

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