INFLATION

INFLATION
• It is the rise in prices of goods and services within a particular economy wherein, the purchasing power of consumers
decreases, and the value of the cash holdings erode.
• In India, the Ministry of Statistics and Programme Implementation (MoSPI) measures inflation.
• Some causes that lead to inflation are: Increase in demand, reduction in supply, demand-supply gap, excess circulation of
money, increase in input costs, devaluation of currency, rise in wages, among others.
• How Inflation is measured?
1. Wholesale Price Index (WPI) – It is estimated by the Ministry of Commerce & Industry and measured on a monthly basis.
• Measures the average change in the prices of commodities for bulk sale before the retail level.
• Most widely used inflation indicator.
2.Consumer Price Index (CPI) – It is calculated by taking price changes for each item in the predetermined lot of goods and
averaging them. Measures the change in the retail price of goods and services with reference to a base year.
3.Producer Price Index – It is a measure of the average change in the selling prices over time received by domestic producers for
their output.
4.Commodity Price Indices – It is a fixed-weight index or (weighted) average of selected commodity prices, which may be based
on spot or futures price
5.Core Price Index – It measures the prices paid by consumers for goods and services without the volatility caused by
movements in food and energy prices. It is a way to measure the underlying inflation trends.
6.GDP deflator – It is a measure of general price inflation.
• TYPES OF INFLATION OVERVIEW:
• INFLATION BASED ON CAUSES

• DEMAND PULL INFLATION:
• • “Too much money chasing too few goods”.
• • The overall output of the economy does not fall in this case.
• • CAUSES
• When aggregate demand in an economy outpaces aggregate supply.
• Deficit financing by the government and fiscal stimulus.
• Depreciation of rupee and Increase in Forex reserve.
• Lower interest rates- causes a rise in consumer spending and higher investment. This boost to demand causes a rise in AD and
inflationary pressures.
• Rising real wages. For example, union’s bargaining for higher wage rates.
• COST PUSH INFLATION:
• When prices increase due to the rising cost of inputs like wage increase, high transport price, unavailability of raw materials. With an
increase in prices, the output level of the economy also falls.
• BUILT IN INFLATION:
• This type of inflation involves a high demand for wages by the workers which the firms address by increasing the cost of goods and
services for the customers.
• MONETARY INFLATION:
• RBI printing more and more money (deficit financing) can cause inflation. Monetary inflation is a sustained increase in the money supply
of a country (or currency area).
• STRUCTURAL INFLATION:
• Due to the weak structure of the institutions and markets in the economies, mostly the developing and low income ones. Example- Artificial
shortage of foods/ goods due to hoarding and Poor agriculture produce due to poor monsoons, inadequate irrigation facilities etc.
• PROFIT INDUCED INFLATION:
• If the producers, due to their monopoly position, tend to mark-up their profit margin, it will lead to profit induced inflation.
• REFLATION:
• Reflation is the act of stimulating the economy after a period of economic slowdown or contraction. The goal is to expand output,
stimulate spending and curb the effects of deflation. Policies include tax cuts, infrastructure spending, increasing the money supply and
lowering interest rates.
• SKEWFLATION (Skew + flation):
• It is the skewed rise in the price of some items while remaining item prices remain the same. E.g. Seasonal rise in the price of onions.
• FULL EMPLOYMENT:
• • A situation where all the resources in the economy are fully employed and its operating at the maximum potential.
• INFLATION BASED ON SPEED
• Creeping Inflation (1-4%) When the rate of inflation slowly increases over time. For example, the inflation rate rises from 2% to 3%, to 4% a
year.
• Walking Inflation (2-10%) When inflation is in single digits – less than 10%.Central Banks will be increasingly concerned.
• Running Inflation (10-20%) When inflation starts to rise at a significant rate. It is usually defined as a rate between 10% and 20% a year.
• Galloping Inflation (20%-1000%)
• This is an inflation rate of between 20% up to 1000%. At this rapid rate of price increases, inflation is a serious problem and will be challenging
to bring under control.
• Hyper-inflation
• Inflation rising at a very faster rate, can lead to a total collapse of the currency and economic crisis. E.g., Venezuela is experiencing
hyperinflation due to poor economic policies and weak government.
• EFFECT OF INCREASING INFLATION
• Fixed income people like pensioners and salaried people suffer.
• Uncertainty in the economy so less investment
• Currency depreciates Imports suffer as they become costlier due to depreciation of the currency
• Exports benefit majorly due to the depreciation of the currency
• Real wages decrease.
• Business people gain profits.
• Rupee purchasing power declines.
• Fall in real value of savings.
• Remedies to Inflation
• The different remedies to solve issues related to inflation can be stated as:
• Monetary Policy (Contractionary policy)
• The monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the
requirements of different sectors of the economy and to boost economic growth.
• This contractionary policy is manifested by decreasing bond prices and increasing interest rates. This helps in
reducing expenses during inflation which ultimately helps halt economic growth and, in turn, the rate of inflation.
• Fiscal Policy
• Monetary policy is often seen separate from fiscal policy which deals with taxation, spending by government and
borrowing. Monetary policy is either contractionary or expansionary.
• When the total money supply is increased rapidly than normal, it is called an expansionary policy while a slower increase
or even a decrease of the same refers to a contractionary policy.
• It deals with the Revenue and Expenditure policy of the government .
• Tools of fiscal policy
1. Direct Taxes and Indirect taxes – Direct taxes should be increased and indirect taxes should be reduced.
2. Public Expenditure should be decreased (should borrow less from RBI and more from other financial institutions)
• To know more about the Fiscal policy in India, refer to the linked article.
• Supply Management measures
• Import commodities that are in short supply
• Decrease exports
• Govt may put a check on hoarding and speculation
• Distribution through Public Distribution System (PDS).

INFLATION

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INFLATION

• INFLATION BASED ON CAUSES

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