Inflation and its Characteristics

Introduction

What is Inflation?

Definition of Inflation
In economics, inflation is a rise in the
general level of prices 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 is measured by:

1. Consumer price index (CPI)
A consumer price index (CPI) measures changes in the price
level of consumer goods and services purchased by households.
The annual percentage change in a CPI is used as a measure
of inflation. A CPI can be used to index (i.e., adjust for the
effect of inflation) the real value of wages, salaries, pensions,
for regulating prices and for deflating monetary magnitudes to
show changes in real values.

2.Producer price index (PPI)

A producer price index (PPI) measures average changes
in prices received by domestic producers for their output. It is
one of several price indices.

Inflation rate
In economics, the inflation rate is a
measure of inflation, or the rate of
increase of a price index such as
the consumer price index. It is the
percentage rate of change
in price level over time,
usually one year.

Causes of Inflation
There are various factors which cause inflation
in the economy .

Monetary Factors
Expansion of Money Supply
Increase in Disposable Income

Increase in Indirect Taxes

Drop in exchange Rate

Non-monetary Factors
Rising Population
Natural Calamities
Speculation and Black Money

Structural Factors
Capital Shortage
Limited Efficient Entrepreneurs
Lack of Foreign Capital
Imperfections of the Market
Unemployment

Global Factors
Increase in International Prices
Rise in Fuel Prices

Types of inflation (Rise in price)

Creeping inflation:
The inflation of a nation increases gradually,
but continually, over time.

Wa l k i n g i n f l a t i o n :
When the price rise is moderate. It is a warning signal for
the government to control it before it turns into running
inflation.

Running inflation:
A rapid acceleration in the rate of rising prices
more than 10% per annum is referred as
Running Inflation

Galloping inflation:
Prices rise by double or triple digit inflation rates like
400% or 999% per annum.

Hyperinflation
Extremely rapid or out of control inflation.
There is no precise numerical definition to
hyperinflation.
Price increases are so out of control that the
concept of inflation is meaningless.
The most famous example of hyperinflation
occurred in Germany between January 1922
and November 1923.
By some estimates, the average
price level increased by a factor
of 20 billion!

Money and Prices During Hyperinflations

(a) Austria

(b) Hungary

Index
(Jan. 1921 = 100)

Index
(July 1921 = 100)

100,000

100,000
Price level

Price level

10,000

10,000

Money supply

1,000
100

Money supply

1,000

1921

1922

1923

1924

1925

100

1921

1922

1923

1924

1925

Stagflation
A condition of slow economic growth and relatively
high unemployment accompanied by inflation.
This happened to a great extent during the 1970s,
when world oil prices rose dramatically, fueling
sharp inflation in developed countries.
At least some central banks
have expressed concern over
inflation even as the global
economy seems to be slowing
down.

Types of inflation on the basis of different

causes:

Demand pull inflation

Demand pull inflation may be due to :
a)Increase in money supply
b)Increase in government purchases
c) Increase in exports

Cost push Inflation

Cost push inflation may arise because of :
a) Increase in money wage rates
b) Increase in money prices of raw materials.

INFLATION AND INTEREST RATES

IN DIFFERENT COUNTRIES

Discussion question
Why is inflation bad?

 Unanticipated inflation is bad because it makes

the economy behave like a giant casino.
Gains and losses occur because of
unpredictable changes in the value of money.
If the value of money varies unpredictably over
time, the quantity of goods and services that
money will buy will also fluctuate unpredictably.
Resources are also diverted from productive
activities to forecasting inflation.
Unanticipated inflation leads to :
a) Redistribution of income, borrowers and lenders
b) Too much or too little lending or borrowing

Effects Of Inflation

Positive Effect
Benefit the cartels formed by the companies
Benefit borrowers
Farmers Gain In Inflation

Negative Effect
Fixed income recipients will
be hurt
Lowers national saving
Rising prices of imports

Income diffusion effect

Illusions of making profits

 Rising prices of imports

Existing creditors will be hurt

Currency debasement

Causes business cycles

Causes an increase in tax bracket

EFFECTS OF INFLATION
BENEFITS

DEBTORS
ENTREPRENEURS
FARMERS
UPPER INCOME
GROUPS

LOSES
CREDITORS
FIXED INCOME
GROUPS
CONSUMERS
MIDDLE AND LOWER
INCOME GROUPS

Measures to control Inflation

The Various measures to control inflation are:
1.Monetary Measures
2.Fiscal Measures
3.Other Measures

Monetary measures
The monetary measures which are widely
used to control inflation are divided into:

Bank rate policy

Statutory Liquidity Ratio
Open market operation
Selective credit controls

Fiscal Measures
Taxation
Government expenditure

Public borrowings
Protectionist measures

Other Measures
To Increase Production
Price Control
Rationing