INFLATION

Inflation is a problem burning since the concept of economy came. This is a problem
economists fight to solve and bring down but still now no permanent solution to this burden
on the economy.
Inflation is defined as a sustained increase in the general level of prices for goods and
services. It is measured as an annual percentage increase. As inflation rises, every rupee you
own buys a smaller percentage of a good or service. Thus people loose purchasing power in
short.
However, there is a difference between money inflation'' and price inflation.
When the prices rise due to an expansion of the money supply, it is 'money inflation' but in
the later phase more and more money supply has to be expanded an as such this is known as
'price inflation'.

THEORIES OF INFLATION
Two main theories of inflation mainly:
1. Demand Pull Inflation: This theory can be summarized as "too much money chasing
too few goods". In other words, if demand is growing faster than supply, prices will
increase. This usually occurs in growing economies. Demand pull inflation occurs
when the demand for goods and services exceeds their available supply at the existing
prices.
2. Cost Push Inflation:

When companies' costs go up, they need to increase prices to

maintain their profit margins. Increased costs can include things such as wages, taxes,
or increased costs of imports.

COST OF INFLATION
Almost everyone thinks inflation is evil, but it isn't necessarily so. Inflation affects
different people in different ways. It also depends on whether inflation is anticipated or
unanticipated. If the inflation rate corresponds to what the majority of people are
expecting (anticipated inflation), then we can compensate and the cost isn't high. For
example, banks can vary their interest rates and workers can negotiate contracts that
include automatic wage hikes as the price level goes up.
Problems arise when there is unanticipated inflation:

Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For
those who borrow, this is similar to getting an interest-free loan.

Uncertainty about what will happen next makes corporations and consumers less
likely to spend. This hurts economic output in the long run.

People living off a fixed-income, such as retirees, see a decline in their purchasing
power and, consequently, their standard of living.

The entire economy must absorb repricing costs ("menu costs") as price lists, labels,
menus and more have to be updated.

If the inflation rate is greater than that of other countries, domestic products become
less competitive.

CAUSES OF INFLATTION
a) 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.
b) Deficit financing by the government also contributes to inflationary tendencies.
c) A high population growth leads to increase in demand and money income and cause a
high price rise.
d) Food shortages and shortages of other raw materials may give rise to inflation.
e) Atmosphere of artificial scarcity created by speculators and hoarders also contributes
to inflation.
f) 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
g) The existence of black money may also contribute to inflation to some extent.

EFFECTS OF INFLATION:-

There are positive and negative effects on an economy due to inflation.

Following are the Negative effects of inflation:1) Decrease in the real value of money and other monetary items over time;
2) Investment and saving may be discouraged by uncertainty about future inflation,
3) Reductions in investment of productive capital and
4) Increase savings in non-producing assets. e.g. selling stocks and buying gold.
5) High inflation may lead to shortages of goods if consumers begin hoarding out of concern
that prices will increase in the future.

Following are the Positive effects of inflation:1) Mitigation of economic recessions,

2) Debt relief by reducing the real level of debt.
CONTROL OF INFLATION:Control of inflation requires an integrated set of measures which may be classified as
monetary, fiscal and physical in nature.
1) Monetary measures- Classical economists are of the view that inflation can be
checked by controlling the supply of money. Some of the important monetary
measures to check the inflation are as under:

Control over moneyIt is suggested that to check inflation government should put strict restrictions

on the issue of money by the central bank.

Credit controlCentral bank should pursue credit control policy .In order to control the credit
it should increase the bank rate ,raise minimum cash reserve ratio etc. It can
also issue notice to other banks in order to control credit

2) Fiscal measures- Measures taken by the government to control inflation.

Decrease in public expenditure- One of the main reasons of inflation is excess

public expenditure like building of roads ,bridges etc. Government should
drastically scale down its non essential expenditure.

Delay in payment of old debts: Payment of old debts that fall due should be
postponed for sometime so that people may not acquire extra purchasing
power.

Increase in taxes : Government should levy some new direct taxes and raise
rates of old taxes.

Over valuation of money: To control the over valuation of money it is

essential to encourage imports and discourage exports.

Other measures
1) Increase in the production- One of the major causes of the inflation is the
excess of demand over supply ,so those goods should be produced more
whose prices are likely to rise rapidly .In order to increase production public
sector should be expanded and private sector should be given more incentives.
2)

Proper commercial policy- Those goods which are in scarcity should be

imported as much as possible from other countries and their export should be
discouraged.

3)

Encouragement to savings During inflation government should come out

with attractive saving schemes. It may issue 5 or 10 year bonds in order to
attract savings.

4) Proper investment policy- Investment in those industries should be increased

wherein more production of goods can be generated over a short period of time
.Less investment should be made in industries having long production period.
5) Marginal requirements- It is the difference between the value of security and
loan advanced .