Inflation generally means rise in prices.

Inflation is an increase in the price of a basket of goods and

services that is representative of  the economy as a whole. It is a persistence and substantial rise in general
level of prices after full employment level of output

How India calculates Inflation? There are 2 methods: Wholesale Price Index (WPI) and Consumer
Price Index (CPI)

 Wholesale Price Index: WPI is the index that is used to measure change in the average price level
of goods traded in wholesale market. In India, a total of 435 commodities data on price level is
tracked through WPI which is an indicator of movement in prices of commodities in all trade and
transactions.

 Consumer Price Index (CPI): CPI is a statistical time-series measure of weighted average of
prices of a specific set of goods & services purchased by consumers

 India used the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in
the economy. 2014 onward India started using CPI to decide inflation in the country.

Types of Inflation

On the Basis of Rate of Inflation:

 Creeping Inflation: Rise in the price level at very low rate, or snail’s pace, around 2-3%
per annum is referred to as Creeping Inflation or Mild Inflation.
 Walking Inflation: A sustained price increase from 3 to 7 or below 10% is termed as Walking
Inflation.
 Running Inflation: A sustained price rise A sustained price rise from 10 to 20% per annum is
known as Running Inflation
 Hyperinflation: Running Inflation if not controlled turns into Hyperinflation which is known as
Galloping or Jumping

On the Basis of degree of control: Continuous rise in price without any interruption and control from
the government or any other authority is known as open inflation and when price level in economy is
not allowed to rise (though conditions exist for rise) through the use of government policies like price
controls and rationing, it is known as suppressed inflation

On the Basis of causes of Inflation:

 Demand pull Inflation: The Inflation caused due to demand pressures is known as Demand pull
Inflation

Causes: Increase in quantity of money, Increase in Business outlays or government expenditure,

Foreign expenditure on goods and services

 Cost push Inflation: Increase in the overall price level due to cost pressures is known as cost-
push or supply side inflation.

Causes: Higher wage rates, Higher profit margins, Higher taxes, Higher prices of output
General causes of Inflation

Monetary factors:- Non-monetary factors:-

 Expansion of money supply
 Expansion of Bank credit
 Deficit financing
 Increase in disposable income
 Increase in indirect taxes
 Drop in exchange rate
 Rising population
 Natural calamities
 Speculation and Black money
 Unfair practices by monoply houses
 Poor performance of the farm sector
 Bottlenecks and shortages such as Infrastructure,
capital and Foreign exchange

Effects of inflation

 Business community: Profit rises because of rising prices

 Farmers usually gain during inflation, because they can get better prices for their harvest during
inflation
 Investor- Fixed income recipient will be hurt: Those who invest in debentures and fixed-interest
bearing securities, bonds, etc, lose during inflation. However, investors in equities benefit
because more dividend is yielded on account of high profit made by joint-stock companies
during inflation.
 Borrowers (debtors) - Borrowers win because the real value of their loan repayments decreases
at the same rate as inflation rises.
 Lower production
 Banks increase Interest rates
 Unemployment
 Trade unions to demand higher wages
 Lower consumption -Fixed income recipient will be hurt : Since wages do not rise at the same
rate and at the same time as the general price level, the cost of living index rises, and the real
income of the wage earner decreases.
 Lower national saving: Inflation will lead to deterioration of gross domestic savings and less
capital formation in the economy and less long term economic growth rate of the economy
 Balance of trade as Imports will increase than exports and so the economy will have a deficit

 There are two problems generated by inflation: uneveness and uncertainty

Uneveness: Inflation produces uneven increases in the prices of products. In periods of

inflation it is possible of have some products decrease in price, others increase slowly, while
others increase quickly. This means that some consumers are hurt worse than others. Buyers of
gasoline are hit worse than buyers of DVD’s and computers

Uncertainty: Who else is hurt by the uncertainty? Lenders – banks, etc. Lenders lend money to
earn a profit. To earn a profit, the interest they charge must cover all costs, and be higher than the
rate of inflation. When lenders lend money, they have an expected rate of inflation at the time of
the loan.
In short - 6Why inflation is a cause of concern?

 They create inefficiency in the markets & firms cannot plan from long term perspective
 It discourages saving and investment
 Instability in currency exchange price
 Higher income tax rates
 Higher trade deficit
 Currency debasement (which lowers the value of a currency, and sometimes cause a new
currency to be born)

How to control inflation? Two ways: Monetary measures and Fiscal measures

Monetary measures Fiscal measures

A- Quantitative Methods  Taxation-direct and indirect
 SLR/CRR  Government expenditure
 Interest rates/bank rate  Public borrowings
 OMO(open market operations)  The government can also take some protectionist
 Margin Money measures (such as banning the export of essential
 Repo Rate items such as pulses, cereals and oils to support the
B- Qualitative Methods- domestic consumption, encourage imports by
 Moral suasion lowering duties on import items etc.).
 Rationing
 Direct action

India Inflation Rate