INFLATION

PRESENTED BY :
 ANEERVAAN KUNDU
 VINITA DHAPTE
 SHAHIL JAVED KHAN
 SWARNAV HAZARIKA
 NISHANTH R R
 INTRODUCTION

In macroeconomics, inflation is a rise in the general level of

goods and services in an economy over a period of time.
When the general price level rises, each unit of currency
buys fewer goods and services. Inflation refers to the rise in
the prices of most goods and services of daily or common
use, such as food, clothing, housing, recreation, transport,
consumer staples, etc. Inflation measures the average price
change in a basket of commodities and services over time.
Inflation is indicative of the decrease in the purchasing
power of a unit of a country’s currency. This is measured in
percentage.
 CAUSES OF INFLATION
 Increase in money supply - Increasing in the money supply faster than
the growth in real output will cause inflation . The reason is that there is
more money chasing the same number of goods . Therefore, the
increase in monetary demand causes firms to put up prices.
If the money supply increases at the same rate as real output, then prices
will stay the same.
 Increase in disposable income – Higher wages increase firms costs and
increase consumers disposable income to spend more, causes workers
to demand wage increase and firms to push up prices.
 Deficit financing – Due to this money supply increases and the
purchasing power of the people also increases which increases the
aggregate demand and the price also increases.
 Foreign exchange reserves – Increase in foreign exchange reserves by
selling the rupee in the market which is already awash with liquidity .
This excess liquidity may create some inflationary pressure.
 EFFECTS OF INFLATION
 They add inefficiencies in the market , and make it difficult for companies to
budget or plan long-term.
 Uncertainty about the future purchasing power of money discourages investment
and saving.
 There can also be negative impacts to trade from an increased instability in
currency exchange prices caused by unpredictable inflation.
 Higher income tax rates.
 Inflation rate in the economy is higher than rates in other countries; this will
increase imports and reduce exports , leading to a deficit in the balance of trade.
 NEGATIVE EFFECTS

 It is difficult for consumers to purchase more goods.

 It generates very bad effects on the poor labor force.
 Inflation reduces the living standard and purchasing power of people.
 It is harmful for creditors .
 A decrease in the real value of money and other items over time.
 Lowers national saving.
 Rising interest rates discourage consumers and business from borrowing.
 TYPES OF INFLATION
 ON THE BASIS OF DEGREE OF GOVERNMENT CONTROL:
• Open inflation: When prices rise in an open market, i.e., a market where there is
no control on prices by the government or any authority, then such inflation is
called open inflation. Open inflation happens in a completely free market where
there is no form of control on prices, factors of production, consumption, import
or export.
• Suppressed inflation: When the government imposes physical and monetary
controls to check open inflation, it is known as repressed or suppressed inflation.
Government themselves are often producers and sellers of wide range of
commodities and they want to keep their own prices low by price restrictions and
controls.
 ON THE BASIS OF POLITICAL CONDITIONS:
• War-time inflation: Inflation that takes place during the period of a war-like situation is
known as War-Time inflation. During a war, scare productive resources are all diverted
and prioritized to produce military goods and equipment. This overall result in very
limited supply or extreme shortage (low availability) of resources (raw materials) to
produce essential commodities. Production and supply of basic goods slow down and
can no longer meet the soaring demand from people. Consequently, prices of essential
goods keep on rising in the market resulting in War-Time Inflation.
• Peace time inflation: When prices rise during a normal period of peace, it is known as
Peace-Time Inflation. It is due to huge government expenditure or spending on capital
projects of a long gestation (development) period.
 ON THE BASIS OF SCOPE:
• Sectoral Inflation: It occurs when there is a rise in the prices of goods and services
produced by certain sector of the industries. For instance, if prices of crude oil
increases then it will also affect all other sectors (like aviation, road transportation,
etc.) which are directly related to the oil industry. For e.g. If oil prices are hiked,
air ticket fares and road transportation cost will increase.

• Comprehensive Inflation: When the prices of all commodities rise throughout the
economy it is known as Comprehensive Inflation. Another name for
comprehensive inflation is Economy Wide Inflation.
 INFLATION RATE
Inflation refers to an overall increase in the Consumer Price Index
(CPI), which is a weighted average of prices for different goods.
The set of goods that make up the index depends on which are
considered representative of a common consumption basket.
Therefore, depending on the country and the consumption habits
of the majority of the population, the index will comprise
different goods. Some goods might record a drop in prices,
whereas others may increase, thus the overall value of the CPI
will depend on the weight of each of the goods with respect to
the whole basket. Annual inflation, refers to the percent change
of the CPI compared to the same month of the previous year.
Year Inflation Rate (%) Annual Change
2019 7.66% 2.80%
2018 4.86% 2.37%
2017 2.49% -2.45%
2016 4.94% -0.93%
2015 5.87% -0.48%
2014 6.35% -4.55%
2013 10.91% 1.60%
2012 9.31% 0.45%
2011 8.86% -3.13%
2010 11.99% 1.11%
2009 10.88% 2.53%
2008 8.35% 1.98%
2007 6.37% 0.58%
2006 5.80% 1.55%
 Controlling Inflation
There are broadly two ways of controlling inflation in the economy –
1.) Monetary Measures

2.) Fiscal Measures

MONETARY MEASURES
The most important and commonly used method to
control inflation is monetary policy of the Central
Bank. Most central banks use high interest rates as
the traditional way to fight or prevent inflation.
Monetary measures used to control inflations include –
 Bank rate policy
In case of inflations, Central Banks tend to increase their interest rates. Higher rates make borrowing
more expensive and saving more attractive. This ultimately leads to a slower growth of consumer
spending and investment and helps in closing the inflationary gap.
A higher interest rate also leads to an increased exchange rate, which helps to reduce inflationary
pressure by –
• Making imports cheaper
• Reducing demand for exports
• Increasing incentive for exporters to cut costs
 Cash Reserve Ratio (CRR)
Cash reserve ratio is the share of a bank’s total deposit that is mandated by the Reserve Bank of India
(RBI) to be maintained with the latter in the form of liquid cash.
During inflationary periods, the RBI increases the CRR, decreasing the loanable funds available with the
banks. This in turn, slows down investment and reduces the supply of money in the economy. As a result,
it helps in bringing down the inflation rate. However, it also negatively impacts the growth of the
economy.
 Open Market Operations (OMO)
Open market operation (OMO) is an activity undertaken by the Central to give (or take) liquidity in its
currency to (or from) a current bank or a group of banks.
In order to tackle inflation in the economy, open market operations target a specific short – term interest
rate in the debt market. This is target is changed periodically to achieve and maintain an inflation rate
within a target range.
• Under a currency board, OMO would be used to achieve and maintain a fixed exchange rate in
relation to some foreign currency.
• Under a gold standard, notes would be convertible to gold, and so OMO could be used to keep the
value of a flat currency constant relative to gold.
Fiscal Measures to control Inflation include –
 Increase in Taxes

Increase in rates of tax leads to decrease in the spending of

disposable income and thus, lead to a fall in the aggregate
demand of an economy. Ceteris Paribus, this will lead to a
lower level of inflation.
 Increase in Savings
The government, in this case reduces public expenditure and encourage savings in the
economy. With a cut in the public expenditure, the govt. demand for goods and services
decrease, along with a decrease in private income and consumption expenditure. This, on the
other hand, helps to reduce the inflationary gap.
 Surplus Budgeting
Surplus budget refers to a budget where estimated total receipts are more than estimated total
expenditure. In case of surplus budget, government takes more money from the economy than
it injects into it. It results a fall in aggregate demand and price level in the economy and helps
to combat inflationary situations. 
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