INFLATION EXPLAINED INFLATION EXPLAINED

OUEST EDUCATION
+91 9891344571
+91 9811300980
Definition of Inflation Definition of Inflation
InflaIion mcans a pcrsIsJcnJ rIsc In prIcc
IcvcIs o! commodIJIcs and scrvIccs.,
IcadInc Jo a !aII In currcncy`s purchasInc
powcr.
A counJry Is saId Jo undcr prcssurc o!
In!IaJIon whcn Jhc prIccs o! mosJ coods
and scrvIccs conJInuc Jo crccp upward.
In!IaJIon rcduccs savIncs, pushcs up
InJcrcsJ raJcs, dampcns InvcsJmcnJ, Icads
Jo dcprccIaJIon o! currcncy whIch In Jurn
makcs ImporJs cosJIy.
ow Inflation Affects Economy ow Inflation Affects Economy
Inflation occurs when the total demand for goods and services in an economy
exceeds the supply of the same. When the supply is less, the prices of these
goods and services would rise, leading to a situation called inflation.
Inflation affects the rich and poor and it poses a threat to the economy. When
inflation affects economy, to maintain the same living standard you have to pay
more for same amount of goods and services you had used prior to inflation.
Remember that your income may not increase at same rate as inflation.
People tend to save less in an economy affected by inflation because the price of
services and goods are very high and there is nothing or very less left over income
available to save.
ow Inflation Affects Economy ow Inflation Affects Economy
Inflation discourages the exports as domestics sales are
attractive and BOP problems can be caused. Inflation may
erode the external competitiveness of domestic products
if it leads to higher production costs such as wage
increase, higher interest rates and currency devaluation.
It will redistribute the income from those on fixed income,
such as pensioners, and shifts it to those who draw an
inflation-linked income and business.
y does Inflation occur ? y does Inflation occur ?
Some reasons for occurrence are
If the cost of production of goods and services increases, the price of the end
product would also increase.
There is a possibility of inflation when the business houses and industries
increases their profit margins.
Fiscal Inflation occurs when there is excess government spending.
Inflation also occurs due to excess liquidity in market.
Black Money is also a reason for inflation.
%ypes Of Inflation %ypes Of Inflation
epending on
Rate of Growth
of Prices
-Creeping Inflation is a rate of general price rise of 1-5% a
year. If it is 3-5% a year it erodes the purchasing power of the
money when continued over many years, but it is manageable.
Low creeping inflation could be good for economy as producers
and traders makes reasonable profit which encourages them to
invest.
-%rotting Inflation is usually defined as 5-10% annual rate of
increase in the general price level, if not contained it might
convert in to galloping inflation of 10-20% per year.
%ypes Of Inflation %ypes Of Inflation
-Demand Pull Inflation inflation caused by increase
in demand due to increased private and government
spending.
-Cost Pus Inflation Also referred to as supply
shock inflation caused by reduced supplies due to
increased prices of inputs, for example crude prices
globally have gone up causing supply constraints
which means higher costs of production.
-Structural Inflation A type persistent inflation
caused by deficiencies in certain conditions in the
economy such as backward agricultural sector that is
unable to respond to peoples increased demand for
food, inefficient distribution etc.
epending
upon
Causes
easures to Control Inflation easures to Control Inflation
Reducing the central bank interest rates and increasing the bank interest
rates.
Controlling prices and wages
Providing cost of living allowance to citizens in order to create demand in the
market.
Fiscal measures include reducing indirect taxes.
ual pricing like in case of sugar.
Supply side factors include making goods available at regulated price>
ow to measure Inflation ow to measure Inflation
WPI
(Whole
Sale Price
Index)
CPI
(Consumer
Price
Index)
Cost of
Living
Index
PPI
(Producer
Price
Index)
Quest Education Quest Education
A Pioneer Institute for Coacing in A Pioneer Institute for Coacing in
Bank PO / Clerk / SSC Bank PO / Clerk / SSC
9891.344.571 / 9811.300.980