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INFLATION
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 India, a fast developing nation-----
growing at the rate of 9% per annum
was facing a high rate of inflation
-------- over 12% in the 2nd half of
2008 which had created economic,
social and also political problems of
the country.
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 Government policy makers would
like to have --------------------------
• low inflation,
• high output growth, and
• low unemployment.
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 1.INFLATION:

• Inflation is an increase in the overall price level. Keeping

Inflation low has long been a goal of government
policy. Especially problematic are hyperinflations.

 Hyperinflation : Chronic Inflation

• A period of very rapid increases in the overall price level.
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• Most Americans are unaware of what
life is like under very high inflation.
• In some countries at some times
people were accustomed to prices
rising by the day, by the hour or
even by the minute.
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• Hyperinflations are rare.
• Nonetheless, economists have
devoted much effort to identify the
costs and consequences of even
moderate inflation.
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o Inflation :
 Continuous increase in prices.

o Deflation : In economics, deflation is a

decrease in the general price level of goods
and services.
 Continuous decrease in prices.
 Deflation occurs when the inflation rate falls
below 0% (a negative inflation rate).
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 Inflation reduces the real value of money
over time;
 Conversely, deflation increases the real
value of money – the currency of a national or
regional economy.
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o Disinflation :
Recording of Negative(-) inflation.
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o Depression:
Complete decrease in prices, slow down
in production and rising of
unemployment.
Ex- Decrease in Real estate , Decrease in cement and
iron prices and lay off and Retrenchments in auto and
other industries.
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o Reflation: (Steps to increase price)

Originally it was used to describe a

recovery of price to a previous
desirable level after a fall caused by a
recession.
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o Stagflation: In economics, stagflation
is a situation in which the inflation rate is high
and the economic growth rate is low.
• With no increase in production there is
an situation of increase in prices of
goods and services.
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 Causes of stagflation:
stagflation
• Stagflation can result when the productive
capacity of an economy is reduced by an
unfavorable supply shock, such as an increase
in the price of oil for an oil importing country.
• Such an unfavorable supply shock tends to
raise prices at the same time that it slows the
economy by making production more costly
and less profitable.
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Inflation :
• Inflation refers to a persistent rise in prices.
• Simply put, it is a situation of too much money and too few
goods.

• Thus, due to scarcity of goods and the presence of many

buyers, the prices are pushed up.
•
• Inflation occurs when most prices are rising by some degree
across the whole economy.
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 This is caused by four possible factors, each of which is
related to basic economic principles of changes in supply
and demand: 
 Increase in the money supply.
 Decrease in the value of money.
 Decrease in the aggregate supply of goods and services.
 Increase in the aggregate demand for goods and
services.

 Inflation is basically a monetary phenomenon. Excess

money supply is an important characteristic of inflation.
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• Look at what inflation is and how it
works,
• we will ignore the effects of money
supply on inflation and concentrate
specifically on the effects of
aggregate supply and demand: cost-
push and demand-pull inflation.  
   
Types of inflation
(Basing on the cause)

 Basing on the cause, inflation is classified into two types

----- Cost Push and Demand Pull

 COST-PUSH INFLATION:
When there is a decrease in the aggregate supply of goods
and services stemming from an increase in the cost of
production, we have cost-push inflation. 
• Cost-push inflation basically means that prices have been
“pushed up” by increases in costs of production.
• Cost of production may raise due to the increase in wages
forced by the trade unions or govt.
• Increase in the rent, interest rates or prices of raw materials
etc also results in increase in the cost of production.
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 Demand-Pull Inflation :

• Demand-pull inflation occurs when there

is an increase in aggregate demand,
categorized by the four sections of the
macro economy:
 1.households, 2. businesses,
3.governments and 4.foreign buyers
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• When these four sectors concurrently want
to purchase more output than the economy can
produce, they compete to purchase limited
amounts of goods and services.
• Buyers in essence “bid prices up”, again,
causing inflation.
• This excessive demand, also referred to as “too
much money chasing too few goods”,
usually occurs in an expanding economy.  
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• Demand-pull inflation is a product of
-------an increase in aggregate demand that
is faster than the corresponding increase in
aggregate supply.

• The converse of inflation, (i.e.) deflation, is

the persistent falling of prices.
• RBI can reduce the supply of money or
increase interest rates to reduce inflation.
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• Bank interest rate depends on many
other factors, out of that the major
one is inflation.

• Whenever you see an increase on

inflation, there will be an increase
of interest rate also.
Types of inflation:
( Basing on the rate)

 Basing on the rate of inflation, it may

be categorized into four types
1.Creeping inflation:
When rise in the prices is very slow and small, it is
called creeping inflation. According to Prof Kent inflation
may be called creeping if the rate of inflation does not
exceed 3% per annum.
It is the mildest form of inflation it is not harmful. In
fact it is considered conducive to economic development.
Creeping inflation is the earliest stage of inflation.
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2. Walking inflation
• This is the second stage of inflation. The
inflation rate is between 2% and 4%.
• Governments should take walking
inflation seriously and try to control it
from escalating further.
• India is experiencing this kind of
inflation.
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3. Running inflation:
• When the rate of inflation is in the range of 4-
10 per cent per annum, it is called running
inflation.
• This is harmful to the economy. If it is not
controlled, it leads to hyperinflation which is
highly dangerous.
• India is experiencing this kind of inflation now.
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4.Galloping inflation or Hyper inflation :
• If the inflation rate exceeds 10 per cent,
galloping(runaway) inflation occurs. It may also be called
hyperinflation.
• It is the extreme form of inflation and the rate of inflation
may go up to 100 per cent or even more.
• It also refers to rapid inflation in which prices increase so
fast that money loses its importance as a medium of
exchange.
• This is highly dangerous and totally upsets the economies,
and have serious social and political implications too.
• This occurred in Germany, Russia and Hungary.
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 Stagflation: No increase in production but there is an
increase in the price rise.
• Stagflation is a situation when high rates of inflation coexists
with high rate of unemployment( a combination of stagnation
and inflation).
• Stagflation is a relatively new phenomenon.
• It is characterized by inadequate growth, inflation and
unemployment.
• Stagflation results from wrong fiscal policies of the Govt.
• The Keynesians recommend wage control to moderate
prise rise.
• Also suggest use of expansionary fiscal policy to increase
income and employment.
Types of inflation
(On the basis of Govt’s reaction)

 On the basis of the governments

reaction, inflation may be classified
as follows:
1. Open inflation
When the government does not control the
prices through administrative measures
and leave it to the market forces such type of
inflation is called open inflation.
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2. Suppressed inflation:
inflation
• When the government imposes restrictions or
controls prices through administrative
measures, suppressed inflation exists.

• When the government lifts the control, open

inflation reappears.
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• In the modern world economy open
economy is a rare phenomenon.
• Countries facing inflation have
suppressed inflation.
• Ex- the 7-8 percent inflation in India in
2008 was virtually a suppressed
inflation.
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 Who gains from inflation? Who loses?
 What costs does inflation impose on
society? How severe they? What
causes inflation?
 What is the best way to stop it?
 These are some of the main concerns
of macro-economists.