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Types, Causes and Measures To Control Inflation

Inflation can be measured using price indexes such as the Wholesale Price Index and Consumer Price Index. The CPI measures price changes facing consumers while the WPI measures prices at the production stage. Inflation can be classified as creeping, walking, running, or galloping based on the annual rate of price increase. It may be caused by demand-pull factors like money supply or cost-push factors like wage increases and commodity price shocks. Monetary and fiscal policies can be used to control inflation through tools like interest rates, taxes, government spending, and price/wage controls.

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69 views18 pages

Types, Causes and Measures To Control Inflation

Inflation can be measured using price indexes such as the Wholesale Price Index and Consumer Price Index. The CPI measures price changes facing consumers while the WPI measures prices at the production stage. Inflation can be classified as creeping, walking, running, or galloping based on the annual rate of price increase. It may be caused by demand-pull factors like money supply or cost-push factors like wage increases and commodity price shocks. Monetary and fiscal policies can be used to control inflation through tools like interest rates, taxes, government spending, and price/wage controls.

Uploaded by

Jagadeesh Putturu
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT-V

INFLATION

Types, Causes and Measures to


control Inflation
Inflation is defined as a sustained increase
in the price level or a sustained fall in the
value of money.
To understand the type of inflation, we
analyse the price trends, the rate of
expansion of money supply and the rate
of increase in demand.
To quantify the amount of inflation in the
economy, indicators such as the
Wholesale Price Index, the Consumer
Price Index and the GDP Deflator are used
Inflation
• Rate of inflation during the seventies and eighties
was very high as compared to the rates of inflation
experienced earlier during previous periods.
• In India, in recent years, 2010-11, 2011-12 and 2012-
13, rate of inflation as measured by consumer price
index (CPI) has been in double digit figures.
• Prior to Jan. 2013, even WPI inflation was quite high
which compelled Reserve Bank of India to adopt
tight monetary policy.
Rate of Inflation

• While inflation means a rise in the general


price level, the rate of inflation is the rate of
change of the general price level. It is
measured by a simple formula as follows:
• Rate of inflation :
Pt - Pt -1
t=  100
Pt -1
Inflation
 Creeping Inflation: A rise in the prices to the extent of 10
percent per decade or one percent per annum is creeping
inflation.
 Walking Inflation :When the rise in price is less than 10
percent per annum it is called as walking inflation.
 Running Inflation: When prices rise at the a speed of 10
to 20 percent per annum it is running inflation.
 Galloping Inflation: Inflation in the double or triple digit
range per annum is labeled as galloping inflation.
 Hyper Inflation: When inflation exceeds 50 percent per
month .
Types of Inflation
• Depending upon the specific causes, three
types of inflation have been distinguished:
• (1) Demand-pull inflation,
• (2) Cost-push inflation, and
• (3) Structuralist inflation.
Demand Pull Inflation
• On the demand side, the major inflationary
factors are:
 money supply;
 disposable income and consumer
expenditures;
 business outlays; and
 foreign demand.
Cost Push Inflation
• The causes of cost push inflation are the following:
 Wage-push Pressures
 Profit-Push and Mark-up Pricing
 Material push due to increasing raw material prices
 Import prices and Exchange Rates
Cost Push Inflation
• The four main autonomous increases in costs
which generate cost-push inflation have been
suggested:
• Oil Price Shock
• 2. Farm Price Shock
• 3. Import Price Shock
• 4. Wage-Push Inflation
Structuralist inflation

• Substitution possibilities between


consumption and production and inter-
sectoral flows of resources between
different sectors of the economy are not
quite smooth and quick so that inflation in
them cannot be reasonably explained in
terms of aggregate demand and aggregate
supply.
Control of Inflation

• In view of the serious repercussions of inflation on the economy,


various measures are taken to control inflation.
 Monetary Policy
 Fiscal Policy
 Wage Control
 Price Control
 Indexation
(indexation - a system of economic regulation: wages and interest
are tied to the cost-of-living index in order to reduce the effects
of inflation)
Monetary Policy
• Monetary policy can be used to control
inflation particularly demand pull inflation by
using bank rate, open market operations and
cash reserve ratio and a number of selective
credit control measure like credit authorisation,
moral suasion etc.
• Higher interest rate to attract savings and
increasing CRR and SLR.
FISCAL POLICY
• The important fiscal measures used to control
inflation are as follows:
• Increase in taxes: Taxes can be increased to cut
personal consumption expenditure but it should
not discourage savings, production and
investment.
• Increase in savings: Government may start saving
scheme with high rate of interest etc.
• Budget: More allocation in the budget should be
for capital expenditure to tackle cost push inflation
Cont..
• Public Debt: Public debt should be increased
to reduce the supply of money with the public
in the economy.
• Import: Government should import the goods
in short supply to equate the aggregate
demand with aggregate supply.
• Price control:Fixing upper limit for the prices
of essential commodities is called price
control.
Inflation Measurement
• Price Indexes : A price index measures the
general level of prices in reference to some
base period.
• Types of price index
• Consumer Price Index (CPI)
• Whole Sale Price Index (WPI)
Consumer Price Index (CPI)

• Consumer Price Index (CPI) measures the changes over time in the level of prices of
goods and services that a reference population acquires, use, or pay for consumption.

• CPI is widely used by both government and private sector to measure changes in
prices facing consumers.

• CPI in year ‘n’ Cost of basket in year ‘n’


= ---------------------------------- x 100
Cost of basket in the base year

CPI measures the cost of purchasing a fixed basket of goods


and services monthly by the typical consumer.
•
Whole Sale Price Index (WPI)

• It is also known as producer price index(PPI).


• WPI measures the price changes from the
production side
• WPI measures the price changes at an early
stage of the distribution system.
• It is an index of prices that producers receive for
products at all stages in the production process.
• The index is calculated separately for various
stages in the production process.
Selection of Base Year

• The well known criteria for the selection of


base year are :- (i) a normal year i.e. a year in
which there are no abnormalities in the level
of production, trade and in the price level and
price variations, (ii) a year for which reliable
price data are available and (iii) a year as
recent as possible, and comparable with other
price index series released at national and
state levels.

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