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I would like to dedicate this project to Daulat Ram College, University of Delhi, Delhi-110 007 with special thanks to my mentor Dr. Kalpana Vaish, who provided me with valuable guidance and initiative to undertake a practical exposure to the corporate world.

This has been a tremendous learning experience for me.

Anshul Sabharwal Roll no. 7256 B. Com (H) III yr.


I, Miss. Chavi Aggarwal, B.Com (H) III Year, Daulat Ram College, University of Delhi, hereby declare that this project report is a record of authentic and original work carried out by me in the academic year 2012-13 under the guidance of Dr. Kalpana Vaish, is not published anywhere and has not been submitted to any other University or Institution for any purpose. The report is successfully submitted as partial fulfillment of the requirement of B.COM (H) course at Daulat Ram College, Delhi University.

Ms. Pooja Rani (Academic Mentor) Name)

Anshul Sabharwal (Students




Introduction Methods to calculate inflation Factors Types of inflation Causes of inflation Effects of inflation: negative positive Issues Methods to control Other monetary phenomena Articles on inflation Conclusion Bibliography

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INFLATION Inflation can be defined as a rise in the general price level and therefore a fall in the value of money. Inflation occurs when the amount of buying power is higher than the output of goods and services. Inflation also occurs when the amount of money exceeds the amount of goods and services available. As to whether the fall in the value of money will affect the functions of money depends on the degree of the fall. Basically, refers to an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices. Therefore, inflation can be measured in terms of percentages. The percentage increase in the price index, as a rate per cent per unit of time, which is usually in years. The two basic price indexes are used when measuring inflation, the producer price index (PPI) and the consumer price index (CPI) which is also known as the cost of living index number. Rate of Inflation The annual percentage change in price level represents rate of inflation.

Rate of inflation = change in price 100 = P/P 100 Original price

Example If price level was Rs.2 in 2006 and Rs.3 in 2007, then inflation rate can be calculated as under, Inflation Rate = P/P 100= (3-2)/2 100= 1/2 100= 50%

METHODS TO CALCULATE INFLATION CPI (Consumer price index) CPI covers the retail prices of 375 items in 35 major cities. It shows the rough estimation of cost of living in the urban areas.

WPI (Whole sale price index) WPI is used to measure the price movement of selected items in primary and whole sale markets. It covers those items which are offered in lots for sale. It covers 106 major items.

SPI (Sensitive price index) SPI covers prices of 53 essential items consumed by those households whose monthly income ranges from 3000 to12000 per month.

FACTORS There are several factors which help to determine the inflationary impact in the country and further help in making a comparative analysis of the policies for the same.The major determinant of the inflation in regard to the employment generation and growth is depicted by the Phillips curve. Demand Factors It basically occurs in a situation when the aggregate demand in the economy has exceeded the aggregate supply. It could further be described as a situation where too much money chases just few goods. A country has a capacity of producing just 550 units of a commodity but the actual demand in the country is 700 units. Hence, as a result of which due to scarcity in demand the prices of the commodity rises. This has generally been seen in India in context with the agrarian society where due to droughts and floods or inadequate methods for the storage of grains leads to lesser or deteriorated output hence increasing the prices for the commodities as the demand remains the same. Supply Factors The supply side inflation is a key ingredient for the rising inflation in India. The agricultural scarcity or the damage in transit creates a scarcity causing high inflationary pressures. Similarly, the high cost of labor eventually increases the production cost and leads to a high price for the commodity.The energies issues regarding the cost of production often increases the value of the final output produced. These supply driven factors have basically have a fiscal tool for regulation and moderation. Further, the global level impacts of price rise often impacts inflation from the supply side of the economy. Domestic Factors The underdeveloped economies like India have generally a lesser developed financial market which creates a weak bonding between the interest rates and the aggregate demand. This accounts for the real money gap that could be determined as the potential determinant for the price rise and inflation in India. There is a gap in India for both the output and the real money gap. The supply of money grows rapidly while the supply of goods takes due time which causes increased inflation. Similarly Hoarding has been a problem of major concern in India where onions prices have shot high in the sky. There are several other stances for the gold and silver commodities and their price hike. External Factors The exchange rate determination is an important component for the inflationary pressures that arises in the India. The liberal economic perspective in India affects the domestic markets. As the prices in United States Of America rises it impacts India where the commodities are now imported at a higher price impacting the price rise. Hence, the nominal exchange rate and the import inflation are a measures that depict the competitiveness and challenges for the economy.

TYPES OF INFLATION Depending on the characteristics and the intensity of inflation, there areseveral types, namely. Creeping inflation- When there is a general rise in prices at very low rates, which is usually between 2-4 percent annually, this is known as creeping inflation. Trotting inflation- Whereas, trotting inflation occurs when the percentage has risen from 5 to almost percent. At this level it is a warning signal for most governments to take measures to avoid exceeding double-digit figures.

Galloping inflation- where the rate of inflation is increasing at a noticeable speed and at a remarkable rate, usually from 10-20 percent, it is known as galloping inflation. Hyperinflation- when the inflation rate rises to over 20% it is generally considered as hyper inflation and at this stage it is almost uncontrollable because it increases more rapidly in such a little time frame.

The main difference between the galloping and hyperinflation, is that hyperinflation occurs when prices rise at any moment and there is no level to which the prices might rise.During World War II certain countries experienced a hyper inflation, where the priceindex rose from 1 to over 1,000,000,000 in Germany during Jan uary 1922 to November 1923.

CAUSES OF INFLATION Inflation comes in different forms and those at are familiar with the economic matters would observe that there are trends in the way that prices are moving gradual and irregular in relation to aggregate sections of the economy. This suggest that there ismore than one factor that causes inflation and as different sections of the economy develop it gives rise to different types inflationary periods. The main causes of inflation are: Demand-pull Inflation Cost push Inflation Monetary inflation Structural inflation Imported inflation

DEMAND-PULL INFLATION - occurs when the consumers, businesses or governments demand for goods and services exceed thesupply; therefore the cost of the item rises, unless supply is perfectly elastic. Because we do not live in a perfect mark et supply is somewhat inelastic and the supply of goods and services can only be increased if the factors of production are increased. The increase in demand is created from in increase in other areas, such as the supply of money, the increase of wages which would then give rise in disposable income, and once the consumers have more disposal income this would lead to aggregate spending. As a result of the aggregate spending there would also be an increase in demand for exports and possible hoarding and profiteering from producers. The excessive demand, the prices of final goods and services would be forced to increase and this increase gives rise to inflation.

increase in aggregate demand 1. real GDP rises 2. demand-pull inflation decrease in aggregate demand 1. recession 2. lower inflation

COST-PUSH INFLATION - is caused by an increase in production costs. It is generally caused by an increase in wages or an increase in the profit margins of the entrepreneurs. When wages are increased, this causes the business owner to in turn increase the price of final goods and services which would be passed onto the consumers and the same consumers are also the employees. As a result of the increase in prices for final goods and services the employees realize that their income is insufficient to meet their standard of living because the basic cost of living has increased. The trade unions then act as the mediator for theemployees and negotiate bet ter wages and conditions of employment. If the negotiations are successful and the employees are given the requested wage increase this would further affect the prices of goods and services and invariably affected. On the other hand, when firms attempt to increase their profit margins by making the prices more responsive to supply of a good or service instead of the demand for that said good or service. This is usually done regardless to the state of the economy.

increase in aggregate supply 1. real GDP rises 2. lower inflation decrease in aggregate supply 1. recession 2. cost-push inflation

MONETARY INFLATION-occurs when there is an excessive supply of money. Government increases the money supply faster than the quantity of goods increases, which results in inflation. Interestingly as the supply of goods increase the money supply has to increase or else prices actually go down. When a dollar is worth less because the supply of dollars has increased, all businesses are forced to raise prices just to get the same value for their products.

STRUCTURAL INFLATIONPlanned inflation that is caused by a government's monetary policy is called structural inflation. This type of inflation is not caused by the excess of demand or supply but is built into an economy due to the governments monetary policy.In developed countries they are characterized by a lack of adequate resources like capital, foreign exchange, land and infrastructure. Furthermore, overpopulation with the majority depending on agriculture for their livelihood means that there is a fragmentation of the land holdings. There are other institutional factors like land-ownership, technological backwardness and low rate of investment in agriculture. These features are typical of the developing economies. For example, in developing country where the majority of the population lives in the rural areas and depends on agriculture and the government implements a new industry, some people get employment outside the agricultural sector and settle down in urban areas. Because there might be an unequal distribution of land ownership and tenancy, technological backwardness and low rates of investment in agriculture inclusive of inadequate growth of domestic supply of food which corresponds with an increase in demand arising from increasing urbanization and population prices increase. Food being the key wagegood, an increase in its price tends to raise other prices as well. Therefore, some economists consider food prices to be the major factor, which leads to inflation in the developing economies.

IMPORTED INFLATION -Another type of inflation is imported inflation. This occurs when the inflation of goods and services from foreign countries that are experiencing inflation are imported and the increase in prices for that imported good or service will directly affect the cost of living. Another way imported inflation can add to our inflation rate is when overseas firms increase their prices and we pay more for our goods increasing our own inflation.


EFFECTS OF INFLATION Inflation can have positive and negative effects on an economy. Below is a list of negative and positive effects of inflation: Negative Effects are: Hoarding (people will try to get rid of cash before it is devalued, by hoarding food and other commodities creating shortages of the hoarded objects). Distortion of relative prices (usually the prices of goods go higher, especially the prices of commodities). Increased risk - Higher uncertainties (uncertainties in business always exist, but with inflation risks are very high, because of the instability of prices). Income diffusion effect (which is basically an operation of income redistribution). Existing creditors will be hurt (because the value of the money they will receive from their borrowers later will be lower than the money they gave before). Fixed income recipients will be hurt (because while inflation increases, their income doesnt increase, and therefore their income will have less value over time). Increased consumption ratio at the early stages of inflation (people will be consuming more because money is more abundant and its value is not lowered yet). Lowers national saving (when there is a high inflation, saving money would mean watching your cash decrease in value day after day, so people tend to spend the cash on something else). Illusions of making profits (companies will think they were making profits while in reality theyre losing money if they dont take into consideration the inflation rate when calculating profits). Causes an increase in tax bracket (people will be taxed a higher percentage if their income increases following an inflation increase). Causes mal-investment (in inflation times, the data given about an investment is often deceptive and unreliable, therefore causing losses in investments). Causes business cycles (many companies will have to go out of business because of the losses they incurred from inflation and its effects). Currency debasement (which lowers the value of a currency, and sometimes cause a new currency to be born) Rising prices of imports (if the currency is debased, then its purchasing power in the international market is lower).


Positive effects of inflation are: It can benefit the inflators (those responsible for the inflation) It benefits early and first recipients of the inflated money (because the negative effects of inflation are not there yet).

It can benefit the cartels (it benefits big cartels, destroys small sellers, and can cause price control set by the cartels for their own benefits). It might relatively benefit borrowers who will have to pay the same amount of money they borrowed (+ fixed interests), but the inflation could be higher than the interests, therefore they will be paying less money back Many economists favor a low steady rate of inflation, low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reducing the risk that a liquidity trap prevents monetary policy from stabilizing the economy. Tobin effect argues that: a moderate level of inflation can increase investment in an economy leading to faster growth or at least higher steady state level of income. This is due to the fact that inflation lowers the return on monetary assets relative to real assets, such as physical capital. To avoid inflation, investors would switch from holding their assets as money (or a similar, susceptible to inflation, form) to investing in real capital projects.

The first three effects are only positive to a few elite, and therefore might not be considered positive by the general public.


ISSUES The challenges faced by a developing economy are many, especially when in context of the Monetary Policy with the Central Bank, the inflation and price stability phenomenon. There has been a universal argument these days when monetary policy is determined to be a key element in depicting and controlling inflation. The Central Bank works on the objective to control and have a stable price for commodities. A good environment of price stability happens to create saving mobilization and a sustained economic growth. The former Governor of RBI C. Rangarajan points out that there is a long-term tradeoff between output and inflation. He adds on that short-term trade-off happens to only introduce uncertainty about the price level in future. There is an agreement that the central banks have aimed to introduce the target of price stability while an argument supports it for what that means in practice. The Optimal Inflation Rate It arises as the basis theme in deciding an adequate monetary policy. There are two debatable proportions for an effective inflation, whether it should be in the range of 1-3 per-cent as the inflation rate that persists in the industrialized economy or should it be in the range of 6-7 per-cents. While deciding on the elaborate inflation rate certain problems occur regarding its measurement. The measurement bias has often calculated an inflation rate that is comparatively more than in nature. Secondly, there often arises a problem when the quality improvements in the product are in need to be captured out, hence it affects the price index. The consumer preference for a cheaper goods affects the consumption basket at costs, for the increased expenditure on the cheaper goods takes time for the increased weight and measuring inflation. Money Supply and Inflation The Quantitative Easing by the central banks with the effect of an increased money supply in an economy often helps to increase or moderate inflationary targets. There is a puzzle formation between low-rate of inflation and a high growth of money supply. When the current rate of inflation is low, a high worth of money supply warrants the tightening of liquidity and an increased interest rate for a moderate aggregate demand and the avoidance of any potential problems. Further, in case of a low output a tightened monetary policy would affect the production in a much more severe manner. The supply shocks have known to play a dominant role in the regard of monetary policy. The bumper harvest in 1998-99 with a buffer yield in wheat, sugarcane, and pulses had led to an early supply condition further driving their prices from what were they in the last year.


Global Trade Inflation in India generally occurs as a consequence of global traded commodities and the several efforts made by The Reserve Bank of India to weaken rupee against dollar. This has been regarded as the root cause of inflation crisis rather than the domestic inflation. When the US dollar has shrieked by a margin of 30%, RBI had made a massive injection of dollar in the economy make it highly liquid and this further triggered off inflation in non-traded goods. The RB I picture clearly portrays for subsidizing exports with a weak dollar-exchange rate..All these account for a dangerous inflationary policies being followed by the central bank of the country.Further, on account of cheap products being imported in the country which are made on a high technological and capital intensive techniques happen to either increase the price of domestic raw materials in the global market or are they forced to sell at a cheaper price, hence fetching heavy losses.

As can be inferred from the above chart the annual change in the Consumer Price index (CPI) inflation rate has seen a decrease from the highs of 16% in July 2009 to the present lows of the 7 percentage as recent as July 2012, due to constant rate hikes by the Reserve Bank of India (RBI) during these years.


METHODS TO CONTROL A high inflation rate is undesirable because it has negative consequences. However, the remedy for such inflation depends on the cause. Therefore, government must diagnose its causes before implementing policies. 1. Monetary Measures Monetary measures aim at reducing money incomes. (a) Credit Control. One of the important monetary measures is monetary policy. The central bank of the country adopts a number of methods to control the quantity and quality of credit. For this purpose, it raises the bank rates, sells securities in the open market, raises the reserve ratio, and adopts a number of selective credit control measures, such as raising margin requirements and regulating consumer credit. Monetary policy may not be effective in controlling inflation, if inflation is due to costpush factors. Monetary policy can only be helpful in controlling inflation due to demandpull factors. (b) Demonetization of Currency. However, one of the monetary measures is to demonetize currency of higher denominations. Such a measure is usually adopted when there is abundance of black money in the country. (c) Issue of New Currency. The most extreme monetary measure is the issue of new currency in place of the old currency. Under this system, one new note is exchanged for a number of notes of the old currency. The value of bank deposits is also fixed accordingly. 2. Fiscal Measures Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented by fiscal measures. Fiscal measures are highly effective for controlling government expenditure, personal consumption expenditure, and private and public investment. The principal fiscal measures are the following: (a) Reduction in Unnecessary Expenditure. The government should reduce unnecessary expenditure on non-development activities in order to curb inflation. This will also put a check on private expenditure which is dependent upon government demand for goods and services. But it is not easy to cut government expenditure. Though economy measures are always welcome but it becomes difficult to distinguish.

OTHER MONETARY PHENOMENA In Keynes view, rising prices in all situations cannot be termed as inflation. In a condition of under-employment, when an increase in money supply and rising prices are accompanied by the expansion of output and employment, but when1here are bottlenecks in the economy, an increase in money supply may cause cost and prices to rise more than the expansion of output and employment. This may be termed as semiinflation or reflation till the ceiling of full employment is reached. Once full employment level isreached, the entire increase in money supply is reflected simply by the rising prices - the real inflation.Incidentally, Keynes mentions the following four related termswhile discussing the concept of inflation: Deflation Disinflation Reflation Stagflation

DEFLATION It is a condition of falling prices accompanied by a decreasing level of employment, output and income. Deflation is just the opposite of inflation. Deflation occurs when the total expenditure of the community is not equal to the existing prices.

Consequently, the supply of money decreases and as a result prices fall. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, investment spending or personal spending.

DISINFLATION -When prices are falling due to anti-inflationary measures adopted by the authorities, with no corresponding decline in the existing level of employment, output and income, the result of this is disinflation. When acute inflation burdens an economy, disinflation is implemented as a cure. Disinflation is said to take place when deliberate attempts are made to curtail expenditure of all sorts to lower prices and money incomes for the benefit of the community.


REFLATION is a situation of rising prices, which is deliberately undertaken to relieve a depression. Re flation is a means of motivating the economy to produce. This is achieved by increasing the supply of money or in some instances reducing taxes, which is the opposite of disinflation. Governments can use economic policies such as reducing taxes, changing the supply of money or adjusting the interest rates; which in turn motivates thecountry to increase their output.

STAGFLATION- is a stagnant economy that is combined with inflation. Basically, when prices are increasing the economy are deceasing.Some economists believe that there are two main reasons for stagflation. First ly, stagflation can occur when an economy isslowed by an unfavourable supply, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable


Popular Articles About Inflation Rate

Improved supplies bring down vegetable prices October 23, 2012 | Madhvi Sally & Sutanuka Ghosal , ET Bureau AHMEDABAD/KOLKATA: Vegetable prices have come down across India due to improved supplies. Traders expect prices to slide further post-Diwali easing food inflation. However, farmers have been hit by the low prices. Headline inflation inched up to 7.81% in September -highest during the current fiscal year - due to an increase in wheat and cereal prices following an upward revision in diesel prices. However, food inflation slipped to 7.86% in September from 9.14% in August. Inflation at 10-month high, dampens rate-cut hopes October 16, 2012 | ET Bureau NEW DELHI: Headline inflation accelerated to a 10-month high in September, official data on Monday showed, dampening hopes of a rate cut by the central bank this month. The annual rate of inflation, as measured by the wholesale price index , rose to 7.8% from 7.6% in August on the back of a steep rise in fuel inflation to 11.9% from 8.3% in the previous month. The government, which is battling high fiscal deficit, has been nudging the Reserve Bank of India to cut rates Inflation worries make Indian economy a 'slow sore thumb': Arnab Das, Roubini Economics October 4, 2012 | ET Now In an interview with ET Now, Arnab Das, MD, Roubini Economics , talks about the recent reform measures and how various factors are driving the markets. Excerpts: ET Now: The government has made heads turn by introducing a whole host of reform measures and we expect more to be announced later today. RBI unlikely to cut key interest rates on high inflation: Dun & Bradstreet October 16, 2012 | PTI NEW DELHI: The Reserve Bank of India is unlikely to cut key interest rates later this month on account of increasing inflationary pressures, says a report by research firm Dun & Bradstreet. In a research note Dun & Bradstreet India Senior Economist Arun Singh said that it is highly expected of RBI not to ease the policy rate in October 2012 as "inflation continues to spiral upwards, especially manufactured products inflation.


CONCLUSION In this crisis ridden world, economies around the world are experiencing high bouts of inflation and India is no exception to that. Indian economy is facing the effects of severe inflation in the form of rising food and energy prices. Indian government is either clueless about the cause of this inflation or is pretending to be clueless to fox the people from seeing the true cause of this rise in prices. Moreover, it is trying to divert everyones attention from the true cause of inflation by creating scapegoats like consumers (high demand), hoarders, speculators, food drought etc. This is an age old trick which all governments use to fool its populace when it embarks on the inflationary path in full speed. The reason there is double digit inflation in India (and around the world) is this same government money printing process worldwide through its central banks, especially printing by US federal reserve i.e., the so-called quantitative easing program. Inflation in India and all around the world is a result of government & central banks crazy Keynesian Monetarists policies of printing money to get economies out of recession. They dont understand that, by printing money they are only going to create more havoc in peoples life by creating inflation or possible hyperinflation. Printing money is not wealth creation. It actually destroys wealth. It results in capital consumption which reduces the possibilities of higher economic growth in future. People need to understand that consumption never drives any economy. Economies grow because of savings, capital accumulation and production. Without production, consumption is impossible. But, following their inherent inflationary nature, governments around the world are planning to blow another big economic bubble in the form of printing of 100 trillion dollar worth of fiat currency as a measure of global quantitative easing! This plan was discussed in recently concluded Davos World Economic Forum. Recently published papers of International Monetary Fund (IMF, 2010, 2011) lay out the blue print of future monetary system of one world paper currency named after Keynesian dream, Bancor. This plan, if successful, will plunge the world into a systematic worldwide inflation and ensuing global super depression.


BIBLIOGRAPHY Wikipedia Google Newspapers-The Economic Times/Business Standard Self-knowledge