Topic – Inflation ( By – Akash Jamwal)

INFLATION
. What is Inflation
.Measurement of Inflation
.Types Of Inflation
.Cause And Effects Of Inflation
.Control of Inflation
.Inflation and Economic Development
.Inflation In India
What is inflation?
Inflation refers to a broad rise in the prices of goods and services across
the economy over time, eroding purchasing power for both consumers
and businesses. In other words, your dollar (or whatever currency you
use for purchases) will not go as far today as it did yesterday. To
understand the effects of inflation, take a commonly consumed item
and compare its price from one period with another. For example, in
1970, the average cup of coffee cost 25 cents; by 2019, it had climbed
to $1.59. So for $5, you would have been able to buy about three cups
of coffee in 2019, versus 20 cups in 1970. That’s inflation, and it isn’t
limited to price spikes for any single item or service; it refers to
increases in prices across a sector, such as retail or automotive—and,
ultimately, a country’s economy.
Measuring Inflation

. Inflation rate, the annualized percentage change in a general price index, usually
the consumer price index, over time.

.If the price level in the current year is ‘P1’ & in the previous year is ‘Po’, then
inflation for the current year is

(P1-Po)/ Po x 100
 CPI and WPI
CPI: It is a comprehensive measure used for estimation of price changes
in a basket of goods and services representative of consumption
expenditure in an economy is called consumer price index. The
percentage change in this index over a period of time gives the amount
of inflation over that specific period, i.e. The increase in prices of a
representative basket of goods consumed.
• WPI: represents the price of goods at a wholesale stage i.e. Goods
that are sold in bulk and traded between organizations instead of
consumers. WPI is used as a measure of inflation in some economies.
Inflation rate is the difference between WPI calculated at the
beginning and the end of a year. The percentage increase in WPI over
a year gives the rate of inflation for that year.
Other widely used price indices for
calculating price inflation
Commodity price indices: It is a fixed-weight index or (weighted)
• average of selected commodity prices, which may be based on spot or futures prices. It measures
the price of a selection of commodities.
• GDP deflator: is a measure of the price of all the goods and services included in gross domestic
product (GDP).
• Asset price inflation: is an undue increase in the prices of real or financial assets, such as stock
(equity) and real estate.
• Core price indices: The “core” PCE price index is defined as personal
• consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price
index measures the prices paid by consumers for goods and services without the volatility caused
by movements in food and energy prices to reveal underlying inflation trends. This is because
food and oil prices can change quickly due to changes in supply and demand conditions in the
food and oil markets, it can be difficult to detect the long run trend in price levels when those
prices are included.
Causes Of Inflation
1. Cost-Push Inflation
Cost push inflation occurs when we experience rising prices due to higher costs of
production and higher costs of raw materials. Cost push inflation is determined by supply
side factors. Cost-push inflation can lead to lower economic growth and often causes a
fall in living standards, though it often proves to be temporary.
CAUSES OF COST-PULL INFLATION:
1. Rising wages
2. Import prices
3. Raw material prices and commodity costs
4. Profit push inflation
5. Declining productivity
• 6. Higher taxes
Diagram Showing Cost Pull Inflation
. In the diagram X-axis represents the year for which GDP is calculated
Y-axis: represents the price level
While SRAS represents the Short Run Aggregate Supply.
• Short run aggregate supply curve shifts to the left, causing higher
price level and lower real GDP.
Graph showing Inflation In UK

In 2011/12 UK
experienced a rise in
cost push- inflation,
partly due to
depreciation in the
Pound against Euro
Demand – Pull Inflation
Demand pull inflation occurs when aggregate demand is growing at an
unsustainable rate leading to increased pressure on scarce resources
and a positive output gap
When there is excess demand, producers can raise their prices and
achieve bigger profit margins
Demand-pull inflation becomes a threat when an economy has
experienced a boom with GDP rising faster than the long- run trend
growth of potential GDP
• Demand-pull inflation is likely when there is full employment of
resources and SRAS is inelastic
Causes of Demand – Pull Inflation
A depreciation of the exchange rate increases the price of imports and reduces the foreign price of a
country’s exports. If consumers buy fewer imports, while exports grow, AD in will rise – and there
may be a multiplier effect on the level of demand and output
Higher demand from a fiscal stimulus e.g. Lower direct or indirect taxes or higher government
spending. If direct taxes are reduced, consumers have more disposable income causing demand to
rise. Higher government spending and increased borrowing creates extra demand in the circular flow
Monetary stimulus to the economy: A fall in interest rates may stimulate too much demand-for
example in raising demand for loans or in leading to house price inflation. Monetarist economists
believe that inflation is caused by “too much money chasing too few goods” and that governments
can lose control of inflation if they allow the financial system to expand the money supply too quickly.
• Fast growth in other countries – providing a boost to UK exports overseas. Export sales provide an
extra flow of income and spending into the UK circular flow – so what is happening to the
economic cycles of other countries definitely affects the UK
Concept of Deflation ,
Disinflation,Reflation And Stagflation
Deflation – is a condition of falling prices on account of insufficient effective
demand. Results in a continuous fall in level of economic activity & growing
unemployment
Disinflation – it is a process of lowering costs & prices when they are
excessively high. Brings down inflationary trend in prices without causing
unemployment
Reflation – is a moderate degree of inflation that is deliberately undertaken
to relieve depression
• Stagflation – a situation in which a high rate of inflation prevails
simultaneously with a high rate of unemployment or stagnant economic
condition. It is a combination of inflation & stagnation
Effects Of Inflation
 Inflation In India
In India, CPI (combined) is used for calculation of inflation.
• Current inflation in India: India’s retail inflation, which is measured by
the consumer price index (CPI), eased to a four-month low of 4.87% in
Oct. 2023, from 5.02% in Sep. This year, according to the latest data
from the Ministry Of Statistics and Programme Implementation. The
lowest CPI this year was recorded in May at 4.25%.16 Nov 2023
• In India WPI is published on a weekly basis and CPI on monthly basis.