INFLATION

TOPIC: DOES INFLATION EFFECT TO MONETRY POLICIES OF INDIA

Now everyone is familiar with the term ‘Inflation’ as rising prices. This
means the same thing as fall in the value of money. For example, a person
would like to buy 5kgs of apple with Rs. 100, at the present rate of inflation,
say, zero. Now when the inflation rate is 5%, then the person would require
Rs. 105 to buy the same quantity of apples. This is because there is more
money chasing the same produce. Thus, Inflation is a monetary aliment in an
economy and it has been defined in so many ways, which can be defined as
“the change in purchasing power in a currency from period to period relative
to some basket of goods and services.
Measuring Inflation: Inflation is measured by observing the change in the
price of a large number of goods and services in an economy, usually based
on data collected by government agencies. The prices of goods and services
are combined to give a price index or average price level, the average price
of the basket of products. The inflation rate is the rate of increase in this
index; while the price level might be seen admeasuring the size of a balloon,
inflation refers to the increase in its size. There is no single true measure of
inflation, because the value of inflation will depend on the weight given to
each good in the index.
The common measures of inflation include2: Consumer price indexes
(CPIs), Producer price indexes (PPIs), Wholesale price indexes (WPIs),
commodity price indexes, GDP deflator, and Employment cost index.
Inflation and Gross Domestic Product (GDP): Inflation and GDP growth are
Probably the two most important macroeconomic variables. The Gross
Domestic Product (GDP) is the key indicator used to measure the health of a
country's economy. The GDP of a country is defined as the market value of
all final goods and services produced within a country in a given period of
time. Usually, GDP is expressed as a comparison to the previous quarter or
year. For example, if the year-to-year GDP was up by 3%, it means that the
economy has grown by 3% over the last year. A significant change in GDP,
whether increase or decrease, usually reflects on the stock market. The
reason behind this is that, a bad economy usually means lower profits for
companies, which in turn means lower stock prices. Investors really worry
about negative GDP growth. Therefore growth in GDP reflects both on
growth in the economy and price changes (inflation). GDP deflator is based
on calculations of the GDP: it is based on the ratio of the total amount of
money spent on GDP (nominal GDP) to the inflation corrected measure of
GDP (constant price or real GDP). It is the broadest measure of the price
level. Deflators are calculated by using the following
Formula: GDP Deflator =NOMINAL GDP/REAL GDP*100
Current price figures measure value of transactions in the prices relating to
the Period being measured. On the other hand, Constant price figures
express value using the average prices of a selected year, this year is known
as the base year. Constant price series can be used to show how the quantity
or volume of goods has changed, and are often referred to as volume
measures. The ratio of the current and constant price series is therefore a
measure of price movements, and this forms the basis for the GDP deflator.
The GDP deflator shows how much a change in the base year's GDP relies
upon changes in the price level. It is also known as the "GDP implicit price
deflator".
Inflation is caused due to several economic factors:
1. When the government of a country print money in excess, prices increase
to keep up with the increase in currency, leading to inflation.
2. Increase in production and labor costs, have a direct impact on the price of
the final product, resulting in inflation.
3. When countries borrow money, they have to cope with the interest
burden. This interest burden results in inflation.
4. High taxes on consumer products, can also lead to inflation.
5. Demands pull inflation, wherein the economy demands more goods and
services than what is produced.
6. Cost push inflation or supply shock inflation, wherein non availability of a
commodity would lead to increase in prices.
The problems due to inflation would be:
When the balance between supply and demand goes out of control,
consumers could change their buying habits, forcing manufacturers to cut
down production.
The mortgage crisis of 2007 in USA could best illustrate the ill effects of
inflation. Housing prices increases substantially from 2002 onwards,
resulting in a dramatic decrease in demand.
Inflation can create major problems in the economy. Price increase can
worsen the poverty affecting low income household, Inflation creates
economic uncertainty and is a dampener to the investment climate slowing
growth and finally it reduce savings and thereby consumption.
The producers would not be able to control the cost of raw material and
labor and hence the price of the final product. This could result in less profit
or in some extreme case no profit, forcing them out of business.
Manufacturers would not have an incentive to invest in new equipment and
new technology.
Uncertainty would force people to withdraw money from the bank and
convert it into product with long lasting value like gold, artifacts.
Inflation in India Economy India after independence has had a more stable
record with respect to inflation than most other developing countries. Since
1950, the inflation in Indian economy has been in single digits for most of
the years
Between 1950-1960
The inflation on an average was at 2.00%

Between 1960-1970
The inflation on an average was at 7.2%

Between 1970-1980
The inflation on an average was at 8.5%.
Inflation at Present
Inflation in India a menace a few years ago is at a 30 year low. . The
inflation ended at a low of 0.61% in the week ended May 9, 2009 this after
reaching a 16 year high of 12.91 % in August 2008, bringing in a sigh of
relief to policymakers.
All the reason behind inflation are very strong barriers to survive the life, if
all things prices are increasing day by day how can a middle class family
live the life whereas income is same before inflation and after inflation. As
we know that when the financial crises was came in India so many jobs are
cut by industry and inflation was same if a man earning is stop and price are
increasing rapidly so no one survive the life.
"Inflation" & how it eats your money silently & affects your
investments!

Need of the study: my topic it related to rising price of all basic need
which is known as inflation.This term paper show that how inflation can
harm our life. I am trying to show in this paper that how inflation can control
and awareness of inflation to all class family.
Avery body know that the price are hike now these days but nobody know
why the price are rapidly increasing .my purpose of this paper is knowing
about inflation ,why inflation is increase.
Somebody think that if they are investing money today so it will give more
return to us but they don’t know that this money, which is they are investing
now it would be zero after some time because inflation are increasing. so all
are in danger zone so this paper is help to us to know all things which can be
use by us to live the life.