INFLATION

Inflation is defined as a rise in the general level of prices of goods and services in an economy
over a period of time.

It can have an adverse effect on economy. It may discourage saving and investment. High
inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices
will increase in future.

REASONS FOR INFLATION

1. There is inflation in the economy whenever there is an increase in the supply of money in
the economy. Increase in money supply leads to increase in price.
2. Increase in demand or fluctuations in real demand for goods and services or changes in
available supplies such as during scarcities leads to inflation.
3. A slowdown in the production process or a fall in production results in shortage of goods
and thus leads to inflation.
4. International price movements also affect the level of inflation nationally. With an
increase in the prices all over the world the price level also rises within the country.

TYPES OF INFLATION
1. Demand pull inflation:-
This type of inflation is caused due to increased private and government spending. It is
constructive to a faster rate of economic growth since the excess demand and favourable
market conditions will stimulate investment and expansion.

2. Cost push inflation:-

This type of inflation is called supply shock inflation. This is caused by a drop in
aggregate supply. This may be due to natural disasters or rise in prices of inputs.

Inflation is usually measured by calculating the inflation rate of a price index usually the
consumer price index. Inflation rate is the percentage of change of a price index over time.
EFFECTS OF INFLATION
1. Negative-
Rise in general price level implies a fall in purchasing power of currency. The effect of
inflation is not distributed evenly and as a consequence there are hidden costs to some
benefits to others from this fall in purchasing power. High or unpredictable inflation rates
are regarded as harmful to an overall economy. They add inefficiencies in the market and
make it difficult for companies to budget or plan long term. The productivity is reduced
as the companies shift resources away from the products and services in order to focus on
profit and loss from currency inflation.
2. Effect on employees-
As a result, the employees demand high wages to keep up with consumer prices. It in turn
can help fuel inflation.
3. Hoarding-
Inflation leads to hoarding and this creates shortages.
4. Hyper inflation-
If inflation gets totally out of control, it can grossly interfare with the normal workings of
the economy, hurting its ability to supply.

However, controlled inflation is good for the economy. It gives a boost to the economic
activities. An increased demand induces producers to produce more and thus create
development. The inflation levels should however be under control as high inflation may
hamper the economic growth. Thus the government must take necessary measures to control
inflation and keep it at a desired rate.