INFLATION

 

During World War II Cost of Car: «««.. Cost of House: ««« What causes inflation? How does it affect your standard of living?

.   Inflation is defined as a sustained increase in the general level of prices for goods and services. As inflation rises. every rupee you own buys a smaller percentage of a good or service. services. It is measured as an annual percentage increase.

Deflation .Stagflation . There are several variations on inflation: .Hyperinflation .

Demand-Pull Inflation Demand.Cost-Push Inflation Cost So is inflation evil ? .Causes of Inflation .

Ans: Not Necessary Problems arise when there is unanticipated inflation: .Creditors lose and debtors gain .Uncertainty about what will happen next .Decline in purchasing power .Domestic products become less competitive .

2.HOW IS INFLATION MEASURED? 1. Consumer Price Index (CPI) Producer Price Index (PPI) .

It uses a "basket of goods" approach that aims to compare a consistent base of products from year to year. 1. CPI for Urban Wage Earners and Clerical Workers (CPI(CPIW). focusing on products that are bought and used by consumers on a daily basis. CPI for all Urban Consumers (CPI-U).Consumer Price Index (CPI)    (CPI) is the benchmark inflation guide. 2. (CPI- . There are two presented CPI figures.

8 164.7 145.9 170.85 158. OVERALL INDEX 100.1 187.9 6.3 2.4 187.2 -1.16 ) 2.1 4.8 161.2 0.6 4. FOOD & BEVERAGES 53.1.8 184.7 180.0 0 170.1 178.8 8.1 169.9 .5 167.20 165.6 189.1 17.2 160.7 3.8 158.0 214.2 18.8 175.5 0.8 191.0 7.4 1.3 10.1 1.9 137.National Urban Consumer Price Index (1995/96 = 100) MIDMID-AUGUST 2007 (SRAWAN 2064) Weigh t Groups & sub-groups sub1 % 2 2005/06 Jul/A ug 3 June/Jul y 4 Jul/A ug 5 2006/07 May/Ju ne 6 June/Jul y 7 2007/ 08P Jul/Au g 8 Column 5 Over 3 Percentage Change Column 5 Over 4 Column 8 Over 5 Column 8 Over 7 1.00 (14.0 190.8 Grains and Cereal Products Rice and Rice Products Pulses Vegetables and Fruits Spices 18.8 197.0 16.8 194.5 172.2 182.8 184.5 173.4 6.6 183.7 1.0 8.89 1.6 1.0 0.9 170.8 2.4 5.1 189.2 23.2 9.2 23.2 178.3 7.9 175.4 180.1 191.9 159.1 166.7 7.73 7.0 180.1 166.3 1.0 185.0 172.7 171.

. which can distort results  Exclusion of food and energy is only good for so long .  Highly watched and analyzed in the media.  Good regional and industry breakdowns for investor research. Weaknesses:  Volatile month to month  Fixed CPI has certain biases (new product.these costs should be considered when assessing inflation. substitution).Strengths:  Gives most insight into future Fed rate moves.

Used to estimate the total return on investment.    The CPI is used to make adjustments to many cash flow mechanisms. Best known measure for determining cost of living changes . Report of CPI will often move equity and fixedfixedincome markets.

steel etc 3. commodities such as coal.· Shows trends within the wholesale markets. The PPI release has three headline index figures: 1.g. PPI Industry Index (finished) . lumber. or producer level. but imports are not. crude oil and the steel scrap etc 2.Producer Price Index (PPI)     It is ¶Weighted index of prices measured at the wholesale. PPI Commodity Index (crude) e.g. All of the physical goods-producing industries that make up the economy are goodsincluded. PPI Stage of Processing (SOP) Index (intermediate) e.

. The PPI does not represent prices at the consumer level. which is: Finished goods index minus the food and energy components.  The core PPI figure is the main attraction. level.

can skew the data. commodity info. such as energy and food.  Good breakdowns for investors in the companies surveyed (mining. some services sectors)  Can move the markets positively  Data is presented with and without seasonal adjustment Weaknesses:  Volatile elements.  Not all industries in the economy are covered. .Strengths:  Most accurate indicator of future CPI.

Ability to predict the CPI. Many services-based industries have been brought into the index over time servicessuch air. freight etc. .Use for Investors    Very useful for investors in the industries covered in terms of analyzing potential sales and earnings trends.

THE 1997-98 ASIAN FINANCIAL CRISIS 1997 Until 1997. Singapore. Asia attracted almost half of the total capital inflow to developing countries Economies of Southeast Asia maintained high interest rates. Indonesia. Indonesia. attractive to foreign investors looking for a high rate of return Received a large inflow of money and experienced a dramatic run-up in asset prices runAt the same time. Singapore. in the late 1980s and early 1990s. the regional economies of Thailand.    . South Korea experienced high growth rates. 8-12% 8GDP. 1990s. Thailand. Malaysia. and Philippines. rates. the Philippines. Malaysia.

accalaimed it as "Asian economic Bank. could lead to long-term prosperity longHis views were seen as prescient after the financial crisis had become full-blown full-    . article attacking the idea of an "Asian economic miracle" Argued that only growth in total factor productivity (which was increasing marginally only). noted economist Paul Krugman published an 1994. "Asian miracle" miracle" In 1994. IMF and World Bank. and not capital investment (which was prevailing).

Indonesia and South Korea 1990s. and raised the value of the U.S.1990s. became more attractive investment destination relative to Southeast Asia This attracted hot money flows through high short-term shortinterest rates. dollar.S. In mid . Thailand. had large external borrowing which led to excessive exposure to foreign exchange risk in both the financial and corporate sectors U. economy recovered from a recession in the early 1990s 1990s U. thus making their exports less competitive    .S. to which many Southeast Asian nations' currencies were pegged.

these countries' governments were forced to raise domestic interest rates to high levels    . Large quantities of credit encouraged economic climate. The exchange market was flooded with the currencies of the crisis countries. causing a credit crunch and further bankruptcies. The resulting panic among lenders led to a large withdrawal of credit from the crisis countries. currency values. individuals and companies to default on debt obligations. bankruptcies. causing obligations. putting depreciative pressure on their exchange rates. and pushed up asset prices to an unsustainable level These asset prices eventually began to collapse. In order to prevent a collapse of the rates.

Indonesia. world 11. and Indonesia.300 IMF was forced to initiate a $40 billion program to stabilize the currencies of South Korea. Over the same period. recovery.100 to $10. The per capita income (measured by purchasing power parity) in parity) Thailand declined from $8.300 between 1997 and 2005. Thailand. Thailand. declined from $11. The sense of crisis in Asia ebbs.500 to $9.400. government backed loan On Feb 2. 2005. per capita income rose from $6.400. Stock markets continue ebbs. And higher interest rates caused more bankruptcies and further deepen the crisis. in Malaysia it 700.800 to $8. as Korea. crisis. recovery.700. 10.    .600 to $3. in Indonesia it declined from $4.

have been abolished. has now banned the export of maize and pulses and has raised the minimum export price of rice to $1000/tonne. 20% 40% dairy products 12% and some pulses 20% 12% 20% Government has already banned export of wheat last year. Import duties on edible oil and grain 1000/tonne.   . of which food-led foodinflation is the worst. abolished. from the viewpoint of government Newspaper reports suggest that in some cities the consumer price of rice is up 20%.Indian Inflation  Inflation comes in many varieties. edible oils 40%.

And the internet savvy farmers exactly know the food prices in Chicago and London. will hold back their crop during the coming procurement season. accordingly. hoping to sell at much higher prices in later months    . Many farmers. skyrocketed. Government's focus has suddenly shifted from protecting Indian farmers against cheap imports to protecting consumer by cheapening imports The prices are not soaring up due to drought or due to fall in production The problem is that world prices have skyrocketed. and adjust their own actions accordingly. especially the bigger ones.

Argentina. Kazakhstan. Indonesia. India. wheat by 40%. Russia. and soybean oil 60% 40% by 40% 40% As the world demand pushed exporting countries domestic prices to alarming levels. wheat. Kazakhstan. In consequence the world price of rice in the last six months has shot up 60%. oils exports so did Thailand   . and Cambodia have curbed rice. Vietnam. exporting governments began imposing curbs on exports to tame local prices Ukraine.

If every country tries to hoard food. That can't happen immediately Today·s high price will induce farmers to grow more and this could cool prices by early 2009 ² the time for next election. election. curbing exports is a form of national clear. hoarding. hoarding. food prices will naturally rise. And the government can save their bacon rather than anti-inflationary package anti-   . And when government starts to rise. fall. and world prices fall. hoard food out of panic. The lesson is clear. and these results in failure of Indian government's anti-inflation package antiInflation will come down only when world food production rises (not only India·s). the panic itself stokes further inflationary tears.

59% 7.) Old Price (NRs. 36 Soybean oil per ltr.27% 22.Fluctuation of Retail Price in Kathmandu Valley in last few months (From Survey) S.N 1 2 3 4 5 6 7 8 9 Items Current Price (NRs.) 31 75 88 900 73 14 64 % Change 16.13% 66.67% 2.22% 9. 125 Pulse Cooking Gas Kerosene Petrol Diesel Milk Wheat 90 1100 80 15 70 .14% 9.38% Rice per kg.

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