INFLATION

By Hunar, Grade XII Economics

 Index
• Introduction
• Objective of study
• Need and significance of study
• Inflation
• History
• How to measure inflation
• Types of inflation
• Effect & causes of inflation
• Controlling inflation
• Conclusion
Introduction
• Inflation is a long term rise in prices of goods and services by the
devaluation of the currency . Inflation occurs when the amount of buying
power is higher than the output of goods and services. It leads to loss in the
real value in the medium of exchange and unit of account within the
economy. It relates the change in general trend of prices, not changes in any
specific price. For eg if people choose to buy more gold than silver, gold
consequently becomes more expensive. These changes are not related to
inflation.
• Economists believe that very high rates of inflation are harmful. A low, but
steady rate of inflation is preferred by any monetary authority.
Objective of study
• 1. to know more about inflation
• 2. to understand the history of inflation
• 3. to analyze various measures of inflation
• 4. to know how inflation can be controlled
Need and significance of study
• Inflationary actions objects in the whole world. This is very important to
study the various changes the are happened in our country are to inflation.
• This study also helps us to know about the various impacts of inflation.
Inflation
• In economics. Inflation is a sustained
increase in the general price level of
goods and services in an economy over
a period of time.
• When the price level rises, each unit of
currency buys fewer goods and
services. Consequently, inflation
reflects a reaction in one purchasing
power per unit of money. A loss of real
value in the medium of exchange and
unit of account within the economy.
History
• The rapid increase in the quantity of money supply has occurred in
many different societies throughout history changing with different
forms of money used. For instance when gold was used or lead and
reissue them at some nominal value by altering the gold with other
metal, the government profits. This practice would increase the
money supply but at the same time the relative value of each coin
would be lowered as the relative value of the coins becomes lower.
Consumers would need to give more coins in exchange for the
same goods and services berfore. These goods and services would
experience a price increase as the value of each coin are increased
How to measure inflation
• There are two ways of measuring inflation and those are:-
1. CPI (consumer price index)- A measure of price changes in consumer
goods and services such as gasoline, food, clothing and automobiles. The
CPI measures price change from the perspective of the purchaser.
2. PPI (producer price index) – A family of indexes that measure the average
change over time is selling prices by domestic producers of goods and
services. PPIs measure price change from the perspective of the seller.
Types of inflation
• 1. Open Inflation- The rate where costs rise due to economic trends of spending
products and services.
• 2. Suppressed Inflation- Existing inflation disguised by government price controls or
other interferences in the economy such as subsidies.
• 3. Galloping Inflation- very rapid inflation which is almost impossible to reduce.
• 4. Creeping Inflation- Circumstances where the inflation of a nation increases gradually,
but continually, over time. This tends to be typically pattern for many nations.
• 5. Hyper Inflation- Hyperinflation is caused mainly by excessive deficit spending by a
government, some economists believe that social breakdown leads to hyperinflation,
and that its roots lie in political rather than economic causes.
Causes of inflation
Factors on supply side Factors on demand side

Rise in administered prices Increase in money supply

Erratic agriculture growth Increase in disposable income

Agricultural prices policy Deficit financing

Inadequate industrial growth Foreign exchange reserves.

Effects of Inflation
• They add inefficiencies in the market, and make it difficult for companies to
budget or plan long term.
• Uncertainty about the future purchasing power of money discourages
investment and saving.
• There can also be negative impacts to trade from an increased instability in
currency exchange prices caused by unpredictable inflation.
• Higher income tax rates.
• Inflation rate in the economy is higher than rates in other countries; this will
increase imports and reduce exports, leading to a deficit in the balance of
trade.
Controlling inflation
• Monetary policy- Government and central bank primarily use monetary policy to control
inflation. Central bank such as the US Federal increase the interest rate. Slow or stop the
growth of the money supply and reduces the money supply.
• Fixed exchange rates- under a fixed exchange rate currency regime, a country’s currency
is tied in value to another single currency or to a basket of other currencies or sometimes
to another measure of value such as gold. A fixed exchange rate is usually used to
stabilize the value of a currency.
• Gold Standard- The gold standard is a monetary system in which a region’s common
medium of exchange in paper notes that are normally freely converted into pre-set fixed
quantities of gold
• Wage and price controls- Another method attempted in the past have been wages and
price controls. Wage and price controls have been successful in wartime environments in
a combination of rationing.
Conclusion
• Inflation is not technically bad. Like so many things in life, the impact of
inflation depends on your personal situation.
• Inflation is a sustained increase in the general level of prices for goods and
services.
• When inflation goes up, there is a decline in the value or purchasing power
of money.
• Variation on inflation includes dis inflation, deflation, hyperinflation and
stagflation.