INFLATION

CONCEPTS
INFLATION DEFINATION
GENERAL PRICE LEVELS INCREASES VALUE OF MONEY (PURCHASING POWER OF MONEY ) FALLS MONEY CIRCULATION > PRODUCTION

PROBLEMS
PRICE RISE IS FASTER THAN INCOME STANDARD OF LIVING DECLINES MAJOR SOCIAL TENSIONS

INTERESTING FACTS
Hungary:-highest ever inflation,1946 Argentina:- 3,500 percent,1989,Brazil, 1,200 percent; Peru, 2,500 percent. Zimbabwe :-1ooooo percent, September, 2008 Delhi :- 1998 when the Bharatiya Janata Party (BJP) lost state elections Onion Prices rised

INFLATION EFFECT ON ZIMBABWE

Decreasing value of Money

Worst effect due to Inflation

TYPES OF INFLATION
Hyperinflation: Is the most extreme inflation phenomenon, with yearly price increases of three-digits percentage points and an explosive acceleration.

Extremely high inflation It could range anywhere between 50% and 100%. High inflation is a situation of price increase of, say, 30%-50% a year. Both kinds can be stable or dangerously accelerate to enter in an hyperinflation condition.

Contd.
Moderate inflation It can be differently defined around the world, given the different inflation histories. As an indication only, one could consider an inflation as moderate when it ranges from 5% to 25-30%. For some countries, the higher part of this range is already "high inflation". Low inflationIt can be characterized from 1-2% to 5%. Around zero there is no inflation (price stability). Below zero, a country faces deflation

RECENT INFLATION DATA

Data source: www.rbi.gov.in

METHODS
WPI

OF

CALCULATION
CPI Measures the average price of consumer goods and services purchased by households.

Measure the temporal price change of wholesale transactions of all commodities in the country.

The weights of items have been assigned in proportion to their share in the total value of transaction (output) in the economy

Weights are assigned in proportion to their share in the consumption expenditure of the family of industrial workers in the selected centers

Measures inflation at each stage of production

Measures inflation only at final stage of production.

India, is amongst few countries of the world, which selected WPI as its official scale to measure the inflation in the economy.

Most of the major economies like US, UK, Japan, France, Singapore and even our arch rival China have selected CPI as its official barometer to weigh its inflation

YEAR WISE WPI INDIA

WPI
250 206.2 200 155.7 150 121.6 100 127.2 132.8 140.7 145.3 161.3 166.8 175.9 187.3 195.6 215.7

Index

50

Data source: www.mospi.nic.in

CAUSE OF INFLATION IN INDIA

 Demand-pull inflation refers to the idea that the
economy actual demands more goods and services than available. This shortage of supply enables sellers to raise prices until an equilibrium is put in place between supply and demand.

 The cost-push theory , also known as "supply shock

inflation", suggests that shortages or shocks to the available supply of a certain good or product will cause a ripple effect through the economy by raising prices through the supply chain from the producer to the consumer. You can readily see this in oil markets. When OPEC reduces oil supply, prices are artificially driven up and result in higher prices at the pump.

Contd..
 Money supply plays a large role in inflationary
pressure as well. Low interest rates correspond with a high levels of money supply and allow for more investment in big business and new ideas which eventually leads to unsustainable levels of inflation as cheap money is available.

EFFECTS OF INFLATION
BENEFITS
 DEBTORS  ENTREPRENEURS  INVESTORS  FARMERS  UPPER INCOME

LOSES
 CREDITORS  FIXED INCOME

GROUPS

GROUPS  CONSUMERS  MIDDLE AND LOWER INCOME GROUPS

EFFECT Contd
 As inflation inched towards 12% while the

industrial growth nosedived to 3.8 per cent.

CRUDE OIL PRICES AND INFLATION

 Crude oil
245 240 235 230 225 220 215 210 205 Jan Feb Mar Apr May Jun Jul Aug Series2

inflation

INDIA VS CHINA

CURRENT SCENARIO
 Indeed, by July 2008, the key Indian Inflation Rate, the Wholesale Price Index, has risen above 11%, its highest rate in 13 years.  This is more than 6% higher than last year, almost three times the RBI s target of 4.1%.

 Hardening of inflation necessitated continuation

and reinforcement of monetary policy actions to dampen excessive demand pressures, while providing a conducive environment for continuation of the growth momentum.

REMEDIES
Cash Reserve Ratio increased. Control over Price of Petrol and Diesel. Decreased import tariff. Tax increase Cement price control. Import duty on non-agricultural products was brought down to 10% from 12.5% 7. Allowed appreciating the Rupee.
1. 2. 3. 4. 5. 6.

TACKLING FOOD PRICE INFLATION

 The demand-supply mismatches need to be

addressed ,  Raising crop yields through the use of modern technology, improved irrigation facilities ,provision of market-based incentive systems for the farmers would help

TACKLING CRUDE OIL ISSUE

 limiting the adverse impact of higher

international oil prices would require adopting strategies of greater decontrol of petroleum product pricing with targeted subsidies, rationalization of applicable taxes and duties to appropriate levels

CURRENT SCENARIO
INFLATION RATE
12 10.72 10 8.78 8

0 25-Oct 1-Nov

Inflation fell sharply to 8.98% in Nov 1st week due to: Fall in prices of fuel,mineral oil as well as manufactured products like steel.

Thank you