Inflation and its control:

Case study of present day

India

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G RO UP 2


Ø Sayali Chitnis 7
Ø Gurunath Choukekar 8
Ø Cyril James 9
Ø Sushil Dalvi 10
Ø Franson Furtado 68
Ø Savio Gaspar 69
Ø Santosh Ibrampurkar 70

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 “ Inflation is when you
pay fifteen dollars
for the ten-dollar
haircut you used to
get for five dollars
when you had hair.”


 -Sam Ewing (1920-

2001) American
writer and humorist

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Session Plan

1. W h a t is In fla tio n ?
2. T h re e S tra in s o f In fla tio n
3. C la ssifica tio n o f In fla tio n b a se d o n its
so u rce s
4. C a u se s o f in fla tio n
5. H o w it is m e a su re d ?
6. E ffe cts o f in fla tio n o n E co n o m y
a ) Po sitive s o f In fla tio n
b ) N e g a tive s o f In fla tio n
7. M e a su re s to C o n tro lIn fla tio n
8. In fla tio n S ta tistics o f In d ia
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 INFLATION
q “Inflation is nothing more than a sharp upward
rise in price level.”
q
q “Too much money chasing, too few goods.”
q
q Inflation is a state in which the value of money
is falling i.e. price are rising.”


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3 Strains Of Inflation
 1]Low Inflation: Single digit annual
inflation rates(most industrial Countries)


 2]Galloping Inflation: Double digit or

triple digit inflation rates(Countries
suffering from weak govt. or war)


 3]Hyper Inflation: Prices are rising million

or trillion percent per year.(go with money
in basket and come with food in pockets)

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Classification Of Inflation
(Based On Its Source)
qDemand Pull Inflation: Rapid
Money-supply growth increases
demand which in turn increases the
price level.(Too much money chases
too few goods)
qCost- Push inflation( Supply
Shock Inflation): Inflation resulting
from rising costs during periods of
high unemployment and slack
resource utilization. 7
Demand-pull Inflation
D S

Ep1

Ep

D1
Eq Eq1

8
 Cost-push Inflation

D S1
S

Ep1 E1

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Causes Of Inflation
o Increase in money Supply
o High demand for primary
articles
o Surging global oil price hike
o Global Economic Fluctuations
o Future Trading of necessity
goods
o Rising Imported raw materials
o A depreciation in the Exchange
rate
o Rapid growth of Money Supply
o Increasing the rate of growth of
real estate prices
o Deficit Financing 10
How Inflation Rate Is Measured?
 1]CPI Method (Consumer Price Index)


 2]WPI method(Wholesale Price Index)



 3] PPI method(Producer Price Index)



 Inflation Rate(IR):
 IR= PI for a certain year - PI for a comparative year
X 100
 PI for a comparative year

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WPI CPI
 WPI is the index  CPI is a statistical
that is used to time-series
measure the measure of a
change in the weighted average
average price of prices of a
level of goods specified set of
traded in goods and
wholesale market. services
 a total of 435 purchased by
consumers.
commodities data
on price level is  It is a price index
tracked through that tracks the
WPI which is an prices of a
indicator of specified basket of
movement in consumer goods
prices of and services, 12
Drawbacks WPI method
1.WPI does not properly measure the exact
price rise an end-consumer will experience
because, as the name suggests, it is at
the wholesale level.
2.More than 100 out of the 435 commodities
included in the Index are not consumed by
Consumer
3.WPI is supposed to measure impact of prices
on business. But we use it to measure the
impact on consumers.
4.Service sector plays a key role in Indian
economy. Consumers are spending loads
of money on services like education and
health. And these services are not
incorporated in calculation of WPI. 13
But Then Why India is Using WPI?
 There are four different types of CPI indices,
and that makes switching over to the
Index from WPI fairly 'risky and unwieldy.
 Officials say the CPI cannot be used in India
because there is too much of a lag in
reporting CPI numbers.
 The WPI is published on a weekly basis and
the CPI, on a monthly basis. And in India,
inflation is calculated on a weekly basis.


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EFFECTS OF INFLATION:
EFFECTS OF
INFLATION(NEGATIVE):
 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.

 Our fixed income gets depleted & we find ourselves having to
survive on even lesser.

 There can also be negative impacts to trade from an increased
instability in currency exchange prices caused by
unpredictable inflation.

 Higher income tax rates.


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 Contd..


 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.

 Inflation affects you directly when you go to the grocery
store but find that a hundred dollars doesn't get you the
same amount as it did last year.

 Creditors (or savers) are hurt by inflation, but debtors (or
borrowers) are helped by inflation.

 Inflation redistributes real income from some people to
others.
o
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EFFECTS OF INFLATION ON THE ECONOMY :
EFFECTS OF INFLATION
(POSITIVE)
 Some demand-pull inflation encourages firms to increase
production in anticipation of receiving a higher price for the
output sold. This contributes to employment and
investment.

 Inflation encourages firms to seek more efficient methods of
production. This increases the production possibility
frontier for the economy





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 G h a n sh ya m iilm g u rg a o n 04/07/11

Measures to Control
Inflation

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 G h a n sh ya m iilm g u rg a o n 04/07/11

Measures to Control
Inflation
 These are the following measures taken
to control inflation
 1) Monetary Measures
 2) Fiscal Measures
 3) Other Non-monetary Measures


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 G h a n sh ya m iilm g u rg a o n 04/07/11

Monetary Measures

o Raising Bank Rates

o Open Market Operations
o Variable Reserve Ratio
o Fixation of Margin Requirements
o Regulation of Consumer Credit
o Control through Directives
o
o
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 G h a n sh ya m iilm g u rg a o n 04/07/11

Fiscal Measures

o Taxation
o Public Expenditure
o Public Borrowing
o Inducement to Save
o

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 G h a n sh ya m iilm g u rg a o n 04/07/11

Other Non monetary Measures

o Increase in output
o Price control & Rationing
o Imports
o Wage Rates
o
o

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Steps taken by the Government to
control inflation (Ministry of
Finance).

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 How Do Governments/Central Banks
Control Inflation?

o Controlling money flow

o Bank rate
o Open market operation
o Cash reserve ratio
o Statutory liquidity ratio


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INFLATION RATES

2006-2007 2007-2008

Inflation 7.8 12.0

Food inflation 10.3 17.6

Non-food inflation 6.2 6.8

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INDIA INFLATION RATES

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Inflation Statistics

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011 9.30

2010 16.22 14.86 14.86 13.33 13.91 13.73 11.25 9.88 9.82 9.70 8.33 9.47

2009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 13.51 14.97

2008 5.51 5.47 7.87 7.81 7.75 7.69 8.33 9.02 9.77 10.45 10.45 9.70

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Thank You