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INFLATION
• The term “Inflate” means to rise or increase.
• The sustained and unchecked rise in the general prices of the commodities
and fall in the purchasing power of the currency and when this phenomenon
is observed over the long period of time is known as inflation.

Impacts of Inflation:
• Increase in the purchasing power:
➢ Due to Inflation, the supply of the Money gets increased in the
market, hence this tends to increase the purchasing power of the
consumers.

• Decrease in the value of Money:

➢ Due to the increase of the supply of the money in the market, the
value of money decreases.

• Seller’s Monopoly:
➢ Due to the increase in demand, the monopoly of sellers also
increases.

Causes of Inflation

• NREGA:
➢ The Implementation of waged-employment programme ‘NREGA’
(“Mahatma Gandhi National Rural Employment Guarantee or National
Rural Employment Guarantee) on a larger scale resulted in increase
in the average-per-capita income of Indian household.
➢ This has increased their expenditure limit, resulting in higher liquidity
(money) and this leads to increase in demand.
➢ Due to the increase in the demand, there will be a higher liquidity
and ultimately Inflation.

• Dependence on Monsoon for agriculture:

➢ In India 60% of the rural population depends on the agriculture.
➢ Major percentage of farmers are still dependent on monsoon for
irrigation.
➢ The agriculture productivity falls due to failure of monsoon then
aggregate supply is not equal to aggregate demand and when supply
is less than demand there will be rise in the prices. This will result in
demand pull inflation.

• High MSP of Cash Price:

➢ The Government of India fixes the Minimum Support Price (MSP)
even before the Harvesting of the crops.
➢ High MSP of Cash crops than the food crops lead to the inflation.
➢ Rise in the price of international commodities like crude oil, increases
the cost of production and distribution in industrial and agricultural
sector which results in cost push inflation.

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• Poor infrastructure of FCI:

➢ The poor infrastructure of Food Corporation of India (FCI) is also
responsible for the price rise of the food grains.

• Increase in Population:
➢ The increase in the population of a country leads to the increase in
the demands of the commodities which again leads to the increase in
the price of the commodities.

• International Factors:
➢ If price of crude oil in international market increases, the import cost
will rise and hence the price of the diesel, petrol and LPG etc will
increase too.

Methods to Control Inflation:

• Population control:
➢ Population controlling measures will help in the controlling the
inflation.

• Reducing the dependency on Monsoon:

➢ If the dependency of the farmers on monsoon gets decreased, the
productivity of agricultural products will increase too.

• High MSP for food crops:

➢ By introducing high MSP for food crops, the farmers will be motivated
to produce more food crops hence less chance of price rise.

• Role of RBI:
➢ In order to control inflation in Indian economy, RBI has a major role
to play.
➢ It uses the tool of monetary policy & open market operation to absorb
the liquidity.
➢ The RBI first uses its monetary policy in order to increase its key
rates so that loans can be made expensive and prohibit the consumer
in the market from borrowing.
➢ The main objective of monetary policy during inflation is to restrict
the flow of cash from the bank towards the market.
➢ Key rates raised by the RBI during inflation are as follows:
1. Repo Rate – It is a short-term lending rate by the RBI to the
commercial bank.
2. Reverse Repo Rate – It is the rate at which RBI borrows from
the commercial banks.
3. CRR (Cash Reserve Rates) – It is a minimum fraction of the total
deposits of customers which commercial banks hold as reserves
either in cash or gold or govt. security as deposits with the central
banks.
4. SLR (Statutory Liquidity Ratio) – It is the minimum reserve
requirement that the commercial banks are reqd. to maintain in
the form of cash gold or govt. securities.
5. Bank rates – Long term lending rate by RBI to commercial banks.

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Types of Inflation:
• There are five types of inflation given below as follows:

Name of Inflation Percentage RANGE

Creeping Inflation 2 to 3 percent

Walking Inflation 3 to 5 percent

Running Inflation 5 to 10 percent
Galloping Inflation 10 to 20 percent

Hyperinflation 20 to 50 percent

METHODS OF INFLATION MEASUREMENT:

• WPI:
o WPI or Wholesale Price Index is a basket of goods which are
controlled and distributed by the Government to control the rising
prices of commodities.
o The WPI based inflation can be measured on:
▪ Daily Basis
▪ Weekly Basis
▪ Monthly Basis
▪ Yearly Basis
o If prices of WPI listed commodities fall suddenly then it leads to
Deflation.
o If prices of WPI listed commodities increase gradually it leads to
Reflation.
o If prices of WPI listed commodities gradually decreases then it leads
to Disinflation.
o The economic recession along with unemployment is called as
Stagflation.

• CPI:
o It is the annual change in the prices of essential goods and
commodities, which are consumed on daily basis.
o The base year of CPI is 2011-12.
o It is used to measure inflation in fastest developing and developed
economies.

PHILLIPS CURVE:
• The Phillips curve states the relation between Inflation and Unemployment.