SMRK. BK. AK MAHILA MAHAYIDYALA, NASHIK.

Project on: inflation In India

Guided by: kshama vaishampayan maam

Name kanika lal Class: BMS II

Roll no: 02

Index

Inflation: meaning and definition Causes of inflation

Inflation and India Measuring inflation

Effects of inflation in Indian economy Controlling inflation Conclusion

bibliography

Acknowledgement:

I would like to thank the college, SMRK BK AK MAHILA MAHAVIDYALA, for providing a platform to present my project. I would like to thank kshama vaishampayan maam for guiding and helping me to make a better project. I would thank all my other teachers for their support and my parents for helping me find the required information.

Inflation:
In economics, inflation is an average index used to measure the rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Inflation results in loss of value of money. If some commodity demands a price of 10 rupees 10 years ago, it now demands Rs. 50. Thus inflation can be the rate of change acceptable level that enough to create persistence. Definition: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. defined as a sharp increase in of a price index above an lasts over a time period long expectations of its future

Different types of inflations can have widely different determinants, effects and remedies. There is no strictly binding definition of ranges of intensity in price increase. Still, some indications can be given as it follows: 1. Hyperinflation is the most extreme inflation phenomenon, with yearly price increases of three-digit percentage points. Extremely high inflation could range anywhere between 50% and 100%. High inflation is a situation of price increase of, say, 30%-50% a year. Both kinds can be stable or dangerously accelerate to enter in a hyperinflation condition.

2. Moderate inflation can be differently defined around the world. As an indication only, one could consider inflation as moderate when it ranges from 5% to 25-30%. For some countries, the higher part of this range is already "high inflation".

3. Low inflation can be characterized from 1-2% to 5%. Around zero there is no inflation (price stability). Below zero, a country faces deflation.

 Determinants of inflation: 1. A generalized cost increase, as with wages, energy prices (especially oil prices), and certain taxes, is clearly conducive to inflation.

2. Expectations on future rate of inflation, to the extent they are widely accepted and exert influence on decision-making processes, as with long and medium-term wage contracts.

3. Oil price fluctuations exert a distictive important influence on inflation throughout the world. The increase abroad of prices for products that our country purchase, if not counteracted by a re-valuation of the currency, exerts a pressure on the price level, possibly inducing "imported inflation".

 Other economic concepts related to inflation include: 1. deflation a fall in the general price level; 2. disinflation a decrease in the rate of inflation; 3. hyperinflation an out-of-control inflationary spiral; 4. stagflation a combination of inflation, slow economic growth and high unemployment; and 5. Reflation an attempt to raise the general level of prices to counteract deflationary pressures.

Causes of Inflation
Economists believe that inflation is a monetary phenomenon. However, in the short and medium term inflation may be affected by supply and demand pressures in the economy, and influenced by the relative elasticity of wages, prices and interest rates.

1. Over-expansion of money supply i.e. excess liquidity in the economy leads to inflation because too many money would be chasing too few goods.

2. Expansion of Bank Credit Rapid expansion of bank credit is also responsible for the inflationary trend in a country.

3. Deficit Financing: The high doses of deficit financing which may cause reckless spending, may also contribute to the growth of the inflationary spiral in a country.

4. A high population growth leads to increase in

demand and money income and cause a high price rise.

5. Excessive increase in the price of fuel or food products due to political, economic or natural reasons will lead to inflation for short- as well as long-term. For example We all remember that price of crude went up from $50 to $140 within two years. Almost every industry including agriculture, transportation and manufacturing depends on crude for its operation. Any excessive increase in the price of crude leads to increase in cost of goods and services i.e. inflation.

Another example China and India consist of almost 34% of the worlds population. As the economy in these two countries are growing at a rate of over 9%, people are consuming more and more goods due to increased income and better life. Demand for those goods and services have led to a high inflationary environment in these countries.

Measuring inflation
To measure inflation, a number of goods that are representative of the economy are put together into market basket. It is then compared over time. This results in a price index. Price index shows the changes in the cost of the present market basket as a percentage of the cost of that identical basket in the previous year. There are two main price indexes that measure inflation:

Consumer Price Index (CPI) A measure of price changes in the retail market of consumer goods and services such as petrol, food, clothing and automobiles. The CPI measures price change from the perspective of the retail buyer. It is the real index for the common people. It reflects the actual inflation that is borne by the individual. This is not taken into consideration in India. The CPI can be performed as:

The "updated cost" (i.e. the price of an item at a given year, e.g.: the price of bread in 1982) is divided by the initial year (the price of bread in 1970), then multiplied by one hundred.

Wholesale Price Index (WPI): It is used in India. It takes into account the rise in prices of goods and services in a select range of goods and services at the wholesale level. Since the general public does not buy at the wholesale level, it does not give the actual feeling of the amount of pressure borne by the general buyer. But the increase in wholesale prices does affect the retail prices and as such give a feeling of the consumer prices. Producer Price Indexes (PPI) A group of indices that measure the average change over time in selling prices by producers of goods and services. They measure price change from the point of view of the seller. Cost-of-living indices (COLI): These show the fixed incomes and contractual incomes based on measures of goods and services price changes. In the long run, the various PPIs, WPIs and the CPI show a similar rate of inflation. In the short run PPIs often increase before the WPI and CPI. Investors generally follow the CPI more than the PPIs. In India WPI is used instead of CPI.

Controlling inflation
Controlling inflation is one of the most important objectives of government economic policy in the country. Effective policies to control inflation focus on the causes of inflation in the economy. Monetary policy controls the growth of demand by creating an increase in interest rates and a reduction in the real money supply. Some of the ways of controlling inflation are as follows: Monetary policy Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping their inter-bank lending rates at low levels; normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum. A low positive inflation is usually targeted, as deflationary conditions are seen as dangerous for the health of the economy. Monetarists emphasize keeping the growth rate of money steady, and using monetary policy to control inflation. Emphasizing on reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both monetary policy and fiscal policy.

 Fixed exchange rates Under a fixed exchange rate, a country's currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. It can also be used as a means to control inflation. However, as the value of the reference currency rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability. Wage and price controls Another method is wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. In general wage and price controls are regarded as a temporary and exceptional measure, only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. They often have perverse effects, due to

the distorted signals they send to the market. Artificially low prices often cause rationing and shortages and discourage future investment, resulting in yet further shortages. The usual economic analysis is that any product or service that is under-priced is over consumed. Cost-of-living allowance The real purchasing-power of fixed payments is eroded by inflation unless they are inflationadjusted to keep their real values constant. In many countries, employment contracts, pension benefits, and government entitlements are tied to a cost-ofliving index, typically to the consumer price index. A cost-of-living allowance (COLA) adjusts salaries based on changes in a cost-of-living index. Salaries are typically adjusted annually in low inflation economies. During hyperinflation they are adjusted more often. They may also be tied to a cost-of-living index that varies by geographic location if the employee moves.

Effects of Inflation
As we know Inflation is the increase in the price of general goods and service. Thus, food, commodities and other services become expensive for consumption. Inflation can cause both short-term and long-term damages to the economy; most importantly it causes slow down in the economy. 1. People start consuming or buying less of these goods and services as their income is limited. This leads to slowdown not only in consumption but also production. This is because manufactures will produce fewer goods due to high costs and anticipated lower demand. 2. Banks will increase interest rates as inflation increases otherwise real interest rate will be negative. (Real interest ~ Nominal interest rate inflation). This makes borrowing costly for both consumers and corporate. Thus people will buy fewer automobiles, houses and other goods. Industries will not borrow money from banks to invest in capacity expansion because borrowing rates are high.

3. Higher interest rates lead to slowdown in the economy. This leads to increase in unemployment because companies start focusing on cost cutting and reduces hiring. Remember Jet Airways lay off over 1000 employees to save cost.

4. Rising inflation can prompt trade unions to demand higher wages, to keep up with consumer prices. Rising wages in turn can help fuel inflation.

5. Inflation affects the productivity of companies. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation.

Inflation in India
Inflation in India can be shown with the help of below graphical representation:

Conclusion:
I conclude my project topic on inflation by giving all the detailed information about inflation. In todays scenario we hear about the inflation frequently and the tremendous rise in prices of every article. Hoping with the given information about it we soon would be able to overcome the problem of inflation.

Bibliography: Google.com Wikipedia.com Indianinflation.co.in Topmoney.com