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INFLATION: Inflation is defined as a rise in general level of prices of goods and services in an economy over a period of time. When prices rise, each unit of currency buys fewer goods and services. Thus it can also be defined as too much money chasing too few goods. The severity of inflation is often measured in terms of rapidity of price rise. It can be divided into 3 main types: 1. Moderate Inflation This is a mild and tolerable form of inflation. It is typical in most industrialized countries. Following are the major characteristics of moderate inflation: a. Single digit inflation rate b. Does not disrupt economic balance c. Peoples expectations more or less stable Some economists have described upto 3 percent annual rate of inflation as creeping inflation and if it exceeds 10% it is called walking inflation. Walking inflation represents a warning signal for the occurrence of running or galloping inflation if not checked in time. 2. Running and Galloping Inflation When the movement of prices accelerates rapidly, it is running inflation. Economists have not described a range, but a double digit inflation is called running inflation; anything greater than that is called galloping inflation. Galloping inflation is a serious problem and can lead to economic distortions and disturbances. 3. Hyper Inflation In this case prices rise every moment and there is no limit to the height to which the prices might rise. When prices rise over 1000% it is termed as hyperinflation. Austria, Hungary, Poland and Russia witnessed hyperinflation after World War I. The main features of hyperinflation are:

a. It represents the most pathetic deterioration in peoples purchasing power b. The price index moves up by leaps and bounds. c. Inequalities increase and it leads to a breakdown of countrys monetary supply 4. Stagflation Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time. Economists offer two reasons why stagflation occurs. First, it occurs when economy is slowed by an unfavourable supply shock eg: rise in price of oil. It tends to rise prices and at the same time slows economy by making production less profitable. It can also result from improper macroeconomic policies. Eg: Central banks can cause inflation by permitting excessive growth of money supply and government can cause stagnation by excessive regulation of goods market and labour market.

Measures of inflation
Inflation is calculated using the following methods 1) Consumer price Index 2) Whole Sale price Index 3) Cost of living index 4) Producer Price index 5) Capital Goods Price Index 6) Commodity price index 7) GDP Deflator

1) Consumer Price Index

Consumer Price Index gives the measurement of price level of any organization or government. It keeps track on the escalation of prices of the common goods.

Consumer Price Index depicts the monthly variation of prices over a complete year. Employers often use the Consumer Price Index to get the idea about the increment of their employees i.e., the percentage of increment that can be offered. While measuring the Consumer Price Index a predefined and fixed amount of goods and services is taken into account. The shift of price for every individual good in the predefined collection of goods is calculated and then by taking the mean of all of them the Consumer Price Index is computed. Goods are weighed in accordance with their importance in the market. The average is taken over a base period which is one month. Consumer Price Index also covers imported goods.

2) Whole Sale price Index

Wholesale Price Index measures the mean of the changes of goods and services' price on the basis of wholesale price. It explains the market economy and as well as the economy growth. Usually the change of prices of 26 groups of selected goods are taken to determine the Wholesale Price Index. In India, it is the most popular price index used in the business industry and policy market.

Wholesale Price Index is divided into five commodity groups. These are: Agriculture (X) Manufacturing (X)
Quarrying (X) Import and Export (X)

Mining (X)

Where X represents the number of commodities. This is the way to express the number of commodities in each sector. Each of these divisions has again been grouped into many sub commodity group. Altogether there are 257 commodities. Wholesale Price Index's offerings: Wholesale Price Index captures the price movement extensively. Wholesale Price Index is published weekly, with the shortest possible time gap of only two weeks. In economics, Wholesale Price Index is taken as an indicator of the rate of inflation. Wholesale Price Index analyzes the market and monetary conditions. Wholesale Price Index focuses on the changing nature of the economy of different kinds of services like railway, road transportation, telecoms and banking sector etc.

3) Cost of living index

The Cost of Living Index figures out the expense of a certain standard of living maintained over time. Basically it measures the changes of cost. If it rises over time, then it means that there is inflation. It reflects the current price level of goods and services related to some base year. Cost of Living Index can contain employment contracts, other benefits, social security. So, by this idea of adjustment the above mentioned issues can be squared according to the changes in the Cost of Living Index, such as, salaries which can be adjusted yearly. The Cost of Living Index can be used to consider the welfare changes caused by inflation or government policy.

4) Producer Price index

Producer Price Index which was formerly known as wholesale price index measures the average change of the selling prices of the producers who sell goods. To compute this index, the mean of all the changes over a year is usually been taken. It measures the price changes according to the sellers' lookout.

It keeps track of the prices of foods, metals, oil and gases, and many other commodities except the price of services. Producer Price Index has been using the Standard Industrial Classification system to collect and annunciate the data for many years. High volatility items, like energy, have been annulled from the scope of the measurement of this index.

Uses of Producer Price Index: Producer Price Index for an industry computes the mean of all changes in the prices that have been received by selling the outputs. The Producer Price Index arranges the products by using material composition. Producer Price Index regroups the products in accordance with the buyers' class.

5) Capital Goods Price Index

Capital Goods Price Index (CGPI) measures the price changes of fixed capital asset that have been bought by the producers of goods and services. To determine the Capital Goods Price Index, data are collected after every three months through postal scrutiny of price quotas from different purchasers. The different groups of physical capital assets can be Residential Buildings, Shopping malls, factories, office buildings, farmhouses etc. Since the disbursement on goods can be asymmetric due to which data of more than one year is taken. It measures the price stability. It indicates the change in costs for capital assets.

6) Commodity price index

Commodity Price Index gives the weighted mean of the price of a selected commodity, which means any physical object such as food, grain that is interchangeable with other goods of same type, and it's a fixed weighed index. The Economist's commodity price index is regarded as the oldest regularly published price index around the globe. A commodity price index can be used to examine the foresighted usefulness of the commodity prices. It represents the class of a wide range of commodity asset or a specific subset of commodities such as energy or metals.

Categorization of the elements in a Commodity Price Index: Energy. Metals: Metals are of two types:

o Base Metal o Precious Metal.

Agriculture: This consists of grains and livestock.

7) GDP Deflator

GDP, gross domestic product deflator is a method to measure the price change of all new domestic goods and services in the economic system. It gives the net value of all goods and services procured over a specific time. Like consumer price index, GDP deflator doesn't rely upon a constant market basket. The basket is changeable, so new consumption patterns can be shown through this deflator according to the people's reaction to the changing market prices. The GDP deflator can be depicted mathematically by this equation given below: GDP deflator = (Nominal GDP / Real GDP)*100. Nominal GDP: In a nominal GDP, inflation is not taken into account or consideration. It is evaluated on the basis of the current market price. Real GDP: Real values are adjusted for different price level in a year. By dividing the nominal GDP with GDP deflator, the real GDP is computed, and hence, deflates the nominal GDP. Actually, the difference between the deflator and a price index, like the CPI, is not huge. GDP deflator almost gives the accurate measurement of changing prices in the overall economy.

Issues with Inflation Calculation in India

India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for. WPI does not properly measure the exact price rise an end-consumer will experience as it is at the wholesale level. The major issues are more than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view. The last WPI series of commodities in 1993-94.

EFFECTS OF INFLATION:
Inflation affects both the economy of a country and its social conditions, as well as the political and moral lives of its inhabitants. However, in this report we would be concerned with the economic implications of an inflationary situation. An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and services. The effect of inflation is not distributed evenly, and as a consequence there are hidden costs to some and benefits to others from this decrease in purchasing power. For example, with inflation lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit. Individuals or institutions with cash assets will experience a decline in the purchasing power of their holdings. Increases in payments to workers and pensioners often lag behind inflation, especially for those with fixed payments. High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan

long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. Uncertainty about the future purchasing power of money discourages investment and saving. And inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax rates. Some of the other major effects of inflation are as described below:

Price inflation has immense effect on the Time Value of Money (TVM). This acts as a principal component of the rates of interest, which forms the basis of all TVM calculations. The real or estimated changes occurring in the rates of inflation lead to changes in the rates of interest as well.

Inflation exerts impact on the treasury of a nation as well. The most immediate effect of inflation is the decrease in the purchasing power of rupee and its depreciation. Inflation influences the investments of a country. The Inflation-protected Securities may act as a guard against the loss in the purchasing power of the fixed-income investments (like fixed allowances and bonds), which may occur during inflation.

Inflation changes the allocation of income. This exerts maximum effect on the lenders than the borrowers at the time of persisting inflation, because the loans sanctioned previously are paid back later in the form of inflated rupees.

High inflation increases the opportunity cost of holding cash balances and can induce people to hold a greater portion of their assets in interest paying accounts. However, since cash is still needed in order to carry out transactions this means that more "trips to the bank" are necessary in order to make withdrawals, proverbially wearing out the "Shoe Leather" with each trip.

With high inflation, firms must change their prices often in order to keep up with economy wide changes. But often changing prices is itself a costly activity whether explicitly, as with the need to print new menus, so incurring Menu Costs.

INFLATIONUNEMPLOYMENT RELATIONSHIP (THE PHILLIPS CURVE):

When economists look at inflation and unemployment in the short term, they see a rough inverse correlation between the two. When unemployment is high, inflation is low and when inflation is high, unemployment is low. This has presented a problem to regulators who want to limit both. This relationship between inflation and unemployment is the Phillips curve. The short term Phillips curve is a declining one. Phillips explained that the lower the unemployment rate, the tighter the labor market and, therefore, the faster firms must raise wages to attract scarce labor. At higher rates of unemployment, the pressure abated, Phillipss curve represented the average relationship between unemployment and wage behavior over the business cycle. It shows the rate of wage inflation that would result if a particular level of unemployment persisted for some time. As price inflation is closely connected to wage inflation Phillips curve was also used as a measure for policy decisions with respect to prices.

Although the original Phillips curve has been replaced by the Non Accelerating Inflation Rate of Unemployment (NAIRU) but still the Phillips curve is phenomenal in explaining the relation of wages and unemployment.

Causes of Inflation Inflation is a complex phenomenon which cannot be attributed to a single factor. Let us see all the factors that influence INFLATION We can divide the causes into two broad sub headings 1) Monetary Causes 2) Non Monetary Causes Let us see both one by one Monetary Causes: 1. Demand Pull: Inflation due to increase in demand because of increased government and public spending. 2. Cost Push (supply shock inflation): Inflation caused by drops in aggregate supply due to increased prices of inputs. 3. Built-in inflation: Inflation due to internal factors e.g. workers increased wages put on to consumers. 4. Increases in money supply: increase in money supply increases demand for products causing inflation. 5. High Non-Development Expenditure : the growth of defense and nondevelopment expenditure 6. Black Money: Some economists have condemned black money in the hands of tax evaders and black marketers as an important source of inflation in a country. Black money encourages lavish spending, which causes excess demand and a rise in price.

7.

High Indirect Taxes: Incidence of high commodity taxation. Prices tend to rise on account of high excise duties imposed by the Government on raw materials and essential goods.

These all are monetary causes which are directly related to movement and money and causing the inflation changes. These can also be referred to as direct Causes of inflation. Now let us move to Non-Monetary Causes or Indirect causes of inflation. Non-Monetary Causes: 1. High Population Growth: The rising pressure of demand resulting from of population and money income will cause a high price rise in such country. 2. Natural Calamities: Natural calamities also contribute occasionally to the inflationary boost in a country. Events such as cyclones and floods, which destroy village economies, also aggravate the inflationary pressure. 3. Corruption, High Import, Monopolies etc. also cause some influence on inflation These are the constituents of the causes of Inflation. This is not an exhaustive list of causes of Inflation but covers the most important and direct causes of Inflation in theory. Measures taken by Reserve Bank of India to tackle inflation The Reserve Bank of India (RBI) follows a multiple indicator approach to arrive at its goals of growth, price stability and financial stability, rather than targeting inflation alone. The RBI has certain weapons which it wields every time and in all situations to counter any form of inflationary situation in the economy. These weapons are generally the mechanisms and the policies through which the Central Bank seeks to control the amount of credit flowing in the market.

The steps generally taken by the RBI to tackle inflation include Rise in Repo rates (the rates at which banks borrow from the RBI) Rise in Cash Reserve Ratio Reduction in rate of interest on cash deposited by banks with RBI.

The signals are intended to spur banks to raise lending rates and to reduce the amount of credit disbursed. Cash Reserve Ratio: The Reserve Bank of India (Amendment) Act, 2006 gives discretion to the Reserve Bank to decide the percentage of scheduled banks' demand and time liabilities to be maintained as Cash Reserve Ratio (CRR) without any ceiling or floor. Consequent to the amendment, no interest will be paid on CRR balances so as to enhance the efficacy of the CRR, as payment of interest attenuates its effectiveness as an instrument of monetary policy. Repo Rate: The Reserve Bank lends cash to the banks at an interest rate determined by the Reserve Bank's Monetary Policy Committee. This interest rate is called the Reserve Bank's repurchase rate, or Repo rate for short. Banks set their deposit interest rates somewhat below and their lending rates somewhat above the Repo rate. Through the Repo rate, the Reserve Bank indirectly has a strong influence on all the short-term interest rates in the banking system. If the Reserve Bank's analysis shows that inflation is going to be higher than the inflation target set by the government, it has to put a brake on the inflation process. This is done in the following way: The Reserve Bank raises the Repo rate. Banks then usually raise their lending and deposit rates. When people face higher lending rates, they buy fewer goods on credit. This causes less credit to be used and less money to end up with shopkeepers. With less money, credit and expenditure in the economy, it becomes more difficult to raise prices and wages.

 Therefore, inflation is reduced. Other Measures: The RBI also buys dollars from banks and exporters, partly to prevent the dollars from flooding the market and indirectly raising the rupee. This however increases liquidity. To combat this, RBI does "sterilization; it sucks out the rupees it pays out for dollars through sale of sterilization bonds. It then sells these bonds to banks. Consequences: If the CRR and REPO rate are hiked frequently, the economy may take a U - turn, as most commercial banks religiously increase their lending rates, without actually studying the impact. These measures generally taken by the RBI do not effectively tackle inflation but on the other hand effectively stunts the growth pattern of the economy. Inflation is a consequence of increasing demand Vis a Vis the supply in the economy. The demand must be effectively curtailed or pushed down, which the present CRR policy, by reducing the credit flow and money flow in the economy, is not managing to do effectively. Drawbacks: There are two major drawbacks in the CRR REPO policy adopted by the RBI to combat inflation. 1. Monetary tools have proved more effective in economies with greater financial inclusion. They are less effective in economies such as India's, where the majority of the population still has no access to banks, and those with access barely have the resources to open bank accounts. 2. In spite of its being an indirect weapon of credit control, CRR does impact the level of money supply in the economy and plays some role in the fight against inflation. But the impact of the CRR hike will not distinguish as between productive credit and credit meant for consumption. This will hurt growth and the creation of assets in the economy.

Indian Aviation Industry The aviation sector in India is growing at a tremendous rate over the past few years and would continue to do so in the following years. The Government has introduced liberal policies, which has further helped in the growth of the aviation sector. The country is rapidly developing its aviation infrastructure to take-on expansion in passenger and cargo movements. The current infrastructure consists of 126 airports, of which 11 are designated international airports. In 2006-07, Indian airports handled 96 million passengers (including both embarked and disembarked) and 1.4 million tonne cargo. With air travel becoming popular and cheaper, the civil aviation is experiencing a tremendous growth. The Indian aviation sector caters to around 70 million domestic and 25 million international passengers which is growing constantly at a rate of 41% and 15% respectively. The domestic traffic is expected to grow to about 180 million and the international is expected to grow to about 50 million by 2020. Moreover, the growth of domestic and international cargo is also slated at 4.5% and 12% respectively. Apart from this, there is a market for 500 general aircrafts thereby presenting an opportunity of $80bn. Some of the main features of the aviation industry in India are: Operating revenue of domestic Indian carriers was Rs.298 billion 96 million passengers Investments of $150bn by 2020 Projected growth $230mn by 2020 Domestic traffic growth at 42% during 2007-08 Departures per day increased from 865 in 2005-06 to 1153 during the year 200607

Effect of Inflation on Aviation Cost of Aviation Turbine Fuel Increases

The most important effect of inflation as far as the aviation industry is concerned is the rise in ATF prices. The ATF prices have increased manifold over the last few years owing to constant rise in inflation. The growth of the ATF prices can be shown as below.

Employees Remuneration rises

Due to inflation, there is a rise in the salaries and remuneration of the staff, employees, crew members, pilots etc. Thus, there is an overall increase in the wages to be paid to the employees. Ground Networking Charges increase

The cost required to perform the ground level operations also increase steeply as a result of inflation. Increase in Cabin Crew Costs

The cabin crew costs i.e. cost of airhostesses, pilots etc., also rises as they demand more wages and salaries. This is another effect of rising inflation.

Costs of Refreshments Served increases

The cost of serving food, snacks, beverages, refreshments during the flight also increase. This is because there is an increase in the overall product costs due to inflation. Measures Undertaken to Counter Inflation Increase price fares of the tickets

In order to recover the increased costs, the airline companies will increase the price fares of the tickets. In short they will pass on the burden of the increased costs to the end users of their services (fliers). Sack the employees

Since the salaries of the ground staff, crew, pilots increase due to inflation, the airline companies resort to serious cost cutting by sacking its work force. Reduction of services provided

Apart from that, the airline companies also reduce the services provided like telecheckin, personalized services at airports etc. for reduction of costs. Cost cutting measures

If this does not suffice in recovering the costs increased due to inflation, they may resort to severe cost cutting techniques. Is Zero Inflation desirable? Economies desire for rapid economic growth Full employment Price stability

It is desirable to have low or moderate inflation rather than zero inflation

Inflation greases the gears of Capitalism Failing Industries need to cut down wages to meet other demands In absence of Inflation, workers would not approve of reduction in wages Though it is possible to keep the wages flat for a year or two Hence, flat wages with Inflation of 3-4 % is equivalent to pay cut Moderate Inflation leaves room for negative real interest rates to boost economic activity. If interest rates are 2% at a time when inflation is 4%, borrowers are essentially being paid to borrow money. Since interest rates can never go below 0% in nominal terms, this economic tool would not be possible in a world without inflation. Without Inflation any price rise would be highly scrutinized Inflation allows firms with marginal pricing power to push through price increases This would not be questioned as price rise expected due to Inflation This leads to higher profits for firms and eventually higher wages and lower unemployment. Globalization & Inflation Globalization has helped to make the Inflation fluctuations less volatile Globalized nations follow the policies that achieve greater growth, higher income, and faster economic freedom and all this leads to lower rate of inflation Globalization helped many emerging market economies such as India and Latin America to stabilize their rate of inflation. Globalization has increased outsourcing of work to developing countries such as India Due to foreign investments, the domestic companies had to reduce the price of their products and this also helped in reducing the rate of inflation Due to increase in cost of production in developing countries costs were increased This led to increase in Inflation

 Hence Globalisation and Inflation flow together