INFLATION TRAINED V/S

DIRECTION
Done by:

Siddharth Behuria
Siddharth Panigrahi
Simran Agrawal
Simran Kaur
Simran saluja

INFLATION
An increase in the general level of
prices in an economy that is
sustained over a period of time is
called inflation.
When demand is more than the
supply that may lead to inflation.

Measuring Inflation
Inflation is rate of change in the price
level.
If the price level in the current year is p1
and in the previous year p0.
The inflation for the current year is
[(p1-p0)/p0]*100

Types of inflation
1. Creeping Inflation
"When the rise in prices is very low like
that of a snail or creeper,is called creeping
inflation".

2. Running Inflation
Running inflation has inflation rate
between 8-10%.A sense of urgency needs
to be shown in controlling the running
inflation.

3. Hyper inflation :Prices rise very fast at double or triple digit

rate. Also called Runway or Galloping
Inflations.Many developed and
industrialized countries like Italy and
Japan also witnessed the hyper inflation in
the past.

CAUSES OF INFLATION
Inflation is caused due to several economic
factors:
When the government of a country print money in
excess, prices increase to keep up with the
increase in currency, leading to inflation.
Increase in production and labor costs, have a
direct impact on the price of the final product,
resulting in inflation.
There are two main causes for inflation which is
stated as below: Demand Pull amd Cost Push

DEMAND PULL
This type of inflation happens when the
aggregate demand increases more than
the supply. Demands pull inflation,
wherein the economy demands more
goods and services than what is
produced.

COST PUSH INFLATION

When cost of production increases theprice
level automatically increases.Cost push
inflation or supply shock inflation,wherein
non availability of a commodity wouldlead
to increase in prices

Demand pull vs cost push

inflation
If demand pull inflation is correct the government
must bear the cost of excessive spending and
monetary authorities are to be blamed for
"cheap money policy".
On the contrary,if the cost push is the real cause
for inflation then the trade union are to blamed
for excessive wage claim,industries for acceding
them and business firms for making-up profits
aggresively.

Economic impact of
inflation:
There is a wide spread impact of inflation on
the economies world over.
Effect of inflation on the distribution
of income and wealth:
The consumers stand at the loosing
end,while the producers having old
inventories may gain from the inflation.
People with fixed income group are the
wrost sufferers of inflation.

 Inflation also results in black marketing.Sellers

may stock up the goods to be sold in the
future,anticipating further price rise.
Inflation also discourages entrepreneurs in
investing as the risk involved in the future
production would be very high.
Inflation also affects the pattern of production
pattern takes place from consumer goods to
luxury goods.

MEASURING INFLATION

Inflation is often measured either in terms of Wholesale

Price Index or in terms of Consumer Price Index.
Wholesale Price Index(WPI) :
The Wholesale Price Index is an indicator designed to
measure the changes in the price levels of commodities
that flow into the wholesale trade intermediaries.
The index is a vital guide in economic analysis and policy
formulation.

CONSUMER PRICE INDEX:

Consumer price index is specific to particular
group in the population. It shows the cost of
living of the group.
It is based on the changes in the retail prices of
goods or services.
Based on their incomes, consumer spends
money on these particular set of goods and
services.

There are two broad ways in which

governments try to control inflation.
These are1. Fiscal measures
2. Monetory measures

DIRECTIONS TO CONTROL INFLATION

Effective policies to control inflation need to focus on the
underlying causes of inflation in the economy.
Monetary Policy
It can control the growth of demand through an increase
in interest rates and a contraction in the real money
supply.
Monetary measures of controlling the inflation can be
either quantitative or qualitative. Bank rate policy, open
market operations and variable reserve ratio are the
quantitative measures of credit control, by which inflation
can be brought down. Qualitative control measures
involve selective credit control measures.

 Bank rate policy is used as the main instrument of

monetary control during theperiod of inflation. When the
central bank raises the bank rate, it is said to
haveadopted a dear money policy.

Cash Reserve Ratio (CRR) : To control inflation, the

central bank raises the CRRwhich reduces the lending
capacity of the commercial banks. Consequently,flow of
money from commercial banks to public decreases.
Open Market Operations: Open market operations
refer to sale and purchaseof government securities and
bonds by the central bank. To control inflation,central
bank sells the government securities to the public
through the banks.

Fiscal Policy:
Higher direct taxes (causing a fall in disposable income)
Lower Government spending
A reduction in the amount the government sector borrows
each year (PSNCR)
Direct wage controls Government can curb its expenditure to bring the
inflation in control.
The government can also take some protectionist
measures.

THANK YOU