PRICE HIKE IN INDIA
Inflation means a persistent rise in the general price levels for commodities and services and subsequently currency’s purchasing power is falling. “You are all aware that two important external factors have been responsible for higher inflation. First, rising food and commodity prices around the world and second, rising world oil prices,”. There are three major types of inflation, Robert J. Gordon calls the "triangle model"
Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending, etc. Demand inflation is constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion. If there is demand, the price will rise creating inflation. Demand is also good for economy..It clears old stocks and the blocked money is again starts pouring in to the system back. Cost-push inflation, also called "supply shock inflation," is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. Built-in inflation is induced by adaptive expectations, and is often linked to the "price/wage spiral". It involves workers trying to keep their wages up with prices (above the rate of inflation), and firms passing these higher labor costs on to their customers as higher prices, leading to a 'vicious circle'. Built-in inflation reflects events in the past, and so might be seen as hangover inflation.
This interest burden results in inflation. prices increase to keep up with the increase in currency.
. they have to cope with the interest burden. This phenomenon is also known as 'credit-induced inflation'. while supply remains unchanged and prices go up. Black money spending: People having black money spend money lavishly. Repayment of Public Debts: When government repays the internal debts it increases the money supply which pushes the aggregate demand. which increases the demand un-necessarily. their demand for goods and services also increases. Increase in disposable income: When the disposable income of the people increases. Expansion of Credit: When there's expansion in credit beyond the safe limits. Increasing Public Expenditures: Non developmental expenditures of government lead to raise aggregate demand which results as increased demand for factors of production and then increased prices. Deficit Financing Policy: Deficit financing raises aggregate demand in relation to the aggregate supply. This phenomenon is known as 'deficit financing-induced inflation'. Expansion of the Private Sector: Private sector comes with huge capitals and creates employment opportunities. leading to inflation. When the government of a country print money in excess. The higher the money supply the higher will be the inflation. When countries borrow money. which causes the increased demand for goods and services in the economy. resulting in increased income which furthers the increase in demand for goods and services.Demand side factors:
1) Increase in nominal money supply: Increase in nominal money supply without corresponding increase in output increases the aggregate demand. it creates increase in money supply.
raw material.e. black marketers and speculators etc create artificial shortage to earn more profits by keeping the prices high. and shortage of supply which furthers the rise in prices.
Supply side factors
1) Shortage of factors of production or inputs: Shortage of factors of production. And as a short supply of goods in the market the prices go up. Natural Calamities: Natural disasters. Artificial Scarcities: Hoarders.9) 10) 11)
Credit purchase: Due to increase in credit cards people can puchase in credit which in result increase demand Speculation: Speculation is also increase demand especially gold and shares. invasions. the failure of
. diseases etc effect the agricultural production. which causes the increase in prices. labour capital etc causes the reduced production. (in Pakistan bird flu dilemma and sugar crises are the major examples in this regard) Increase in exports (excess exports): When the country has tends to earn maximum foreign exchange and exports more and more without considering the domestic use of the commodities. it creates a shortage of commodities at home which increases the prices. trade unions resort strikes or employers decide lock outs etc the industrial production reduces. High Taxes: High taxes on consumer products. (With reference to Pakistan.e. i. Industrial Disputes: When industrial disputes come to happen. can also lead to inflation. i.
economic or logistic in nature. which increase in cost by increasing the scale of production. Most central banks are tasked with keeping the federal funds lending rate at a low level. normally to a target rate around 2% to 3% per annum.
Today the primary tool for controlling inflation is monetary policy. This factor of inflation may vary in nature. This furthers the increase in prices and hence inflation bursts out. Application of law of diminishing returns: this law applies when the industries use old machines and methods and. Iefficient supply chain: Due to iefficient supply chain supply affects and cause demand on other side. strategic.
A variety of methods have been used in attempts to control inflation. in last couple of years our services sector has grown with the highest rate of 8. For example in Pakistan. and within a targeted low
.8% (mainly telecom sector). i. Most common example is the rise in oil prices. Neglecting the production of consumer goods: When the production of consumer goods is neglected with reference to the increased production of luxuries. it can be political. while basic necessities have been ignored which created increase in the prices of consumer goods. it also creates inflation.e.export bonus scheme during 1950's is the most common example of this type of cause of inflation) 6) Global factors: This factor includes the changing global environment.
thereby exacerbating the problem in the long term. The usual economic analysis is that any product or service that is underpriced is overconsumed. there will be too little bread at official prices. employment contracts. due to the distorted signals they send to the market. resulting in yet further shortages. In addition. It can also be used as a means to control inflation. In many countries. somewhere from about 2% to 6% per annum. as deflationary conditions are seen as dangerous for the health of the economy. as the value of the reference currency rises and falls. pension benefits. if the official price of bread is too low. only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime.
Fixed exchange rates
Under a fixed exchange rate currency regime. They often have perverse effects.
The real purchasing-power of fixed payments is eroded by inflation unless they are inflation-adjusted to keep their real values constant. A fixed exchange rate is usually used to stabilize the value of a currency. and too little investment in bread making by the market to satisfy future needs. However. for example.inflation range. vis-a-vis the currency it is pegged to. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to.
Wage and price controls
In general wage and price controls are regarded as a temporary and exceptional measure. For example. A cost-of-living allowance (COLA) adjusts salaries based on changes in a
. a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability. such as gold). typically to the consumer price index. Artificially low prices often cause rationing and shortages and discourage future investment. so does the currency pegged to it. a country's currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value. A low positive inflation is usually targeted. winning the war being fought. and government entitlements (such as social security) are tied to a cost-of-living index.
This could result in less profit or in some extreme case no profit. • Manufacturers would not have an incentive to invest in new equipment and new technology. Price increase can worsen the poverty affecting low income household. forcing manufacturers to cut down production.
. Salaries are typically adjusted annually in low inflation economies.
The problems due to inflation would be:
When the balance between supply and demand goes out of control. • Uncertainty would force people to withdraw money from the bank and convert it into product with long lasting value like gold. They may also be tied to a cost-of-living index that varies by geographic location if the employee moves. consumers could change their buying habits. artifacts. During hyperinflation they are adjusted more often. • Inflation can create major problems in the economy. • The producers would not be able to control the cost of raw material and labor and hence the price of the final product. forcing them out of business.cost-of-living index.