Inflation

Dr. Pinki Shah

Inflation

•Inflation is the increase in the general

level of prices.
•The inflation rate is measured as a
percentage change in the average
level of prices

01/13/22
Inflation
• Inflation deals with the increase in the weighted
average of prices of all goods and services.
• Deflation, meaning continual decrease in average
prices, Deflation is negative inflation, the price level
is falling.

Price Level of Price Level of

Current year - Previous Year
X 100
Price Level of Previous Year
01/13/22
Price Level and Inflation

2001 2002 2003 2004

Price 100 105 112 120

Level

01/13/22
Deflation
• A period of generally falling prices usually
associated with falling aggregate demand.
Deflation is caused by a decrease in AD that is
overall decrease in consumption, investment and
net exports. This will leave companies with
excess undemanded supply and spare capacity
such as machine and labour.

01/13/22
 Hyperinflation
• Hyperinflation
A very high level of inflation is called
hyperinflation. It is usually caused by the
government printing huge amounts of
money to make up for insufficient tax
revenues.

01/13/22
 Causes of inflation

Demand Pull Inflation

• Inflation due to change in aggregate demand
• Related to change in investment, consumption, and
net export

Demand-pull inflation occurs when

aggregate demand rises more rapidly
than economy’s productive potential
01/13/22
 Causes of inflation

Cost Push Inflation

• This is connected with aggregate supply

Cost Push inflation occurs rising cost

and slack resource utilization

01/13/22
 Costs of high inflation:
• Inflation slows economic growth
• Reduction in purchasing power and Cost to
creditors
• Inflation leads to balance of payment difficulties
• Inflation impairs decision making since it creates
uncertainty about future prices or cost and
distort economic value.
• It result in greater inequality in income
distribution.
• loss of tourism,
• depreciation of the currency causing further
trade effects
01/13/22
Phillip Curve
Society faces a short-run
tradeoff between
unemployment and inflation.
 The Phillip Curve diagram shows that
when unemployment is high, inflation
is very low. And when inflation is high
unemployment is low.

01/13/22