INFLATION

PREPARED BY-
VANSH AGGARWAL
IUU17MBA170
 WHAT IS INFLATION?

Inflation is a sustained increase in the prices of goods

and services in a given period of time as measured by
some broad indexes (such as CPI or WPI). It can also
be viewed as a decline in the purchasing power of
currency.
 DEFINITION OF INFLATION
According to C. Crowther, ”Inflation is the state in
which the value of money is falling and the prices
are rising.”
Here, the rise in prices will always be greater
than a rise in purchasing power of the consumer.
 STAGES OF INFLATION
On the basis of the rate of increase in price
level, inflation can be broadly categrised into
three stages-
1. CREEPING INFLATION.
2. GALLOPING INFLATION.
3. HYPER INFLATION.
 CREEPING INFLATION
It is also known as ‘mid-level’ inflation. It
is not dangerous specially in an economy
where national income is also rising.
Instead, this level of inflation is considered
a must for economic growth.
 GALLOPING INFLATION
If the mid level inflation is not checked and if
it is allowed to go uncontrolled, it may
assume the character of the galloping
inflation. It may have adverse effect on
saving and investment in the economy.
 HYPER INFLATION
A final stage of inflation is hyper inflation. It
occurs when the priceline goes out of control
and the monetary authorities find it beyond
their resources to impose any check on it. At
this stage, there is no limit to which price
level may rise.
 CAUSES OF INFLATION

1. Cost push inflation.

2. Demand pull inflation.
3. Monetary inflation.
 COST PUSH INFLATION
Cost push inflation is the resultant rise in price of a
commodity due to an increase in returns to the
factors of production.
For example – increase in the wages/salaries of
employees will lead to a transfered burden over
the consumers by increasing the price of that
commodity. This in turn creates inflation like
situation in the economy.
 DEMAND PULL INFLATION
In the short run, an increase in demand for a
commodity is much rapid than an increase in
supply for the same commodity. This scarcity of
supply tends to raise the prices of that commodity,
thereby creating an inflationary pressure over the
economy.
 MONETARY INFLATION
Monetary inflation occurs due to an uncontrolled
expansionary monetary policy by either the
government or the central bank of the country.
This takes the form of excessive printing of
currency, leading to the loss of real value of the
currency, as happened during the Greece crisis of
1944.
 EFFECTS OF INFLATION
•It adds inefficiencies in the market, and make
budgeting and forward planning difficult.
•Discourages savings and investment due to
uncertainity about future value of money and a fall in
the real income.
•Increased instability in currency exchange rates
adversely impact trade.
•In international comparision of inflation, countries
with high inflation experiences increased imports and
declined exports, leading to deficit in balance of
trade.
 EFFECTS OF INFLATION ON A
BUSINESS
The phase of inflation impacts the business houses
both, favourably and unfavourably. It leaves people
with low real income and eventually a reduced
demand. This renders reduces the firm’ profitability
thereby leaving MSME vulnerable to such shocks. The
large enterprises sustains the shock due to their huge
capacity to survive upon lower/no profits as well.
 MEASURES OF INFLATION

The inflation is calculated as a change in a price

index. The indices widely used for this are
CONSUMER PRICE INDEX - adopted by countries
such as US, UK, Japan and China, and the
WHOLESALE PRICE INDEX.
 WHOLESALE PRICE INDEX
In the wholesale price index based inflation
calculation, a set of 676 (435 upto last year)
commodities, and their price changes are
considered. The selected commodities are
supposed to represent various strata of the
economy and are supposed to give a
comprehensive WPI value of the economy. It is
called as Headline inflation.
Note- the reformed WPI is based on the recommendations of
Abhijit Sen committees.
 WEIGHTAGE IN WPI-

1).Manufacturing products- 65%.

2).Primary and food articles- 20%.
3).Fuel and electricity- 15%.
 CONSUMER PRICE INDEX
Further, CPI can be classified into-
•CPI(INDUSTRIAL WORKER).
•CPI(URBAN NON MANUAL EMPLOYEES).
•CPI(AGRICULTURAL LABOUR).
•CPI(RURAL WORKER).
In 2011, the CSO brought out a revised CPI, i.e.,
CPI(RURAL+URBAN).
When compared to WPI, CPI presents a truer picture
as it depicts the rate at which consumer gets a
commodity.
 PRODUCER PRICE INDEX

It is calculated at producer level before

commodity reaches the market. It captures
the price rise at producer level.
 IMPACTS OF INFATION
1. The effect of inflation on savers and investors is
that they lose purchasing power.
2. The effect on debtors is positive, because
debtors can pay their debts with money that is
less valuable.
• Inflation transfers money from savers and
investors to debtors. It punishes those who
postponed their demands and rewards he
debtors.
 MEASURES TO CURB INFLATION
Monetary, fiscal and administrative measures are
taken to control inflation at an optimum level.
1. Monetary measures
• Tighter monetary policy to cool down either demand pull
or cost push inflation. For eg. Increase in bank rate/repo
rate to pull out supply of money in the market.
• Use of qualitative control methods such as rise margin on
loans for commodities for which traders have a tendency
to speculate and hoard.
• Other options by central bank, such as open market
operations to extract liquidity from market.
2. FISCAL AND ADMINISTRATIVE
MEASURES-

As far as fiscal and administrative measures are

concerned, the govt. can opt for two routes to bring
down the prices.

. Cut down its own spendings on various schemes,

projects, etc.

. Increase the taxes(both direct and indirect).

 TERMINOLOGIES RELATED TO
INFLATION
1. STAGFLATION- Occurs when inflation and
unemployment, both are at high levels. This
happens when inflation persists for a long period.
2. DEFLATION- this is opposite to inflation. There is
fall in general price levels in the economy. It is
inflation rate below 0%.
3. RECESSION- characterized by negative growth rate
of GDP into successive quarters. Some indicatrs are
slowdown in economy, fall in investment, etc.
 Contd....
4. DEPRESSION- It is an extreme form of recession,
wherein, recession persists for a long time.
Indicators of depression are fall in demand and
consumption of goods and services, sharp decline in
economic output.
5. INFLATION SPIRAL- a result of a process of wage
and price interaction when wages press prices up
and prices pull wages up.
6. REFLATION- deliberate efforts by govt. To reduce
unemployment and increase demand by going for
higher levels of economic growth. This happens by
increased govt. Expenditures, tax cuts, etc.
 Contd...
7. INFLATION TAX- more and more people come
under higher income brackets under progressive
taxation, because as inflation goes up, money
wages also goes up.
COUNTRY INFLATION RATE COMPARED TO 2016

SOUTH SUDAN 379.85%

VENEZUELA 24.95%

SURINAM 55.5%

LIBYA 27.11%

DEMOCRATIC REPUBLIC OF CONGO 22.43

MOST WELL KNOWN INFLATIONS
AROUND THE WORLD.
1. GERMANY- 1923- wherein the wholesale
prices were more than 85,000,000,000pc as
compared to the previous year.
2. GREECE-1944- 99pc of govt. spending was
financed by printing new bank notes, rather
than from taxes. Inflation peaked at
1300000pc.
Thank you