Inflation

Parag Rastogi PGPABM 2008-10

Contents
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What is inflation Types of inflation Causes of inflation Impacts of inflation Control measures Thank you

What is Inflation
In Goulborn’s words, it is a case of “too much money chasing too few goods”. H.G. Johnson defines inflation as “a sustained rise in prices”. A situation when general price level is increasing consistently. General price level refers to prices of all commodities taken together in form of some index. Inflation thus, represents a situation whereby the pressure of aggregate demand for goods and services exceeds the available supply of output.

Inflation –calculation in India
In India inflation is measured on Whole-sale price index. The main component of it are
  

Manufacturing sector Fuel, power, light and lubricants Primary articles-

63.75% 14.23% 22.02%

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The formula used is: I = ∑(I i x W i) / ∑ Wi Where I = Index Number of wholesale prices of a subgroup/group/major group/All commodities, Wi = the weight assigned to the ith item/sub-group/group/major group. Ii = Index of the ith item/sub-group/group/major group

Contd.

The weights of the items are based on the value of transactions which consist of: • value of estimated marketed surplus in the case of agricultural commodities and value of products for sale in the case of non-agricultural products; • total value of imports, including import duties; and • total value of excise duty. Weights have been assigned on the basis of the entire wholesale transaction in the economy. The value of transactions of non-selected commodities has been assigned to the selected items on a pro rata basis.

Types of Inflation

Demand pull Cost push

On the basis of intensity  Creeping

Walking Running Galloping

Causes of Inflation

Inflation may result form an increase in the costs of production. The activities of hoarders and speculators reduce the supply of goods to the market and push up prices Inflation may occur if the government of a country prints money in excess that what is actually required, to deal with financial emergencies The national debts and international lending may also lead to inflation.

Contd.

A serious fall in the exchange rate may also be cited as a cause of inflation The prevalence of black money or unaccounted money and also the existence of counterfeit money lead to inflation. Planning for rapid economic development is another cause of inflation. Huge investments are made which would yield results only after a period of five to ten years. This very long time lag between input and output results in inflation.

Impact of Inflation

Debtors gain and creditors stand to lose by inflation Necessities become dearer When prices rise, producers, speculators and entrepreneurs gain because prices rise at a faster rate than the cost of production Property owners are benefited on account of increasing property value.

Contd.

The hardest hit are those who earn fixed income. Persons who live on post office savings, fixed interest and rent, pensioners, govt. employees and so on suffer because their incomes do not rise in proportion to rise in prices Purchasing power is lowered Distortion in production and allocation of resources take place since producers prefer to produce good consumed by the rich people. Inflation results redistribution of wealth favouring businessmen and hurting consumers, creditors, small investors and fixed income earners.

Control measures
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Monetary measures Fiscal measures Physical or Non-monetary measures
The monetary and fiscal measures will reduce the money supply in the country, whereas the physical and non-monetary measures will increase output and control prices of goods.

Monetary Measures

The Reserve Bank of India can increase the market rate of interest that will reduce the aggregate spending. RBI reduces the cash available to the banking system, the capacity of the banks to lend money to the borrowers will be reduced. The RBI can sell the Government securities to the banks or to the public so that cash available with bank or public can be reduced. Consumer credit control can reduce money supply.

Fiscal Measures

Reduction of government spending Imposition of new taxes Encouragement of savings or introducing compulsory saving schemes

Physical Measurers

Increasing output, increasing imports and decreasing exports so as to increase the availability of goods which are in short supply. Controlling money wages to keep down costs. Price control and rationing. Control over speculation, hoarding and black-marketing. Import of essential commodities and distribution of such goods through fair price shops

Thank You

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