Inflation

A stitch in time saves nine. . . .

Prepared by:
Vaibhav Shrivastava
 Defining Inflation

A rise in the general level of prices of goods and services

in an economy over a period of time

An erosion in the purchasing power of money

 Characteristics of Inflation

A process and not instantaneous

Sustained increase in the general level of price

Increase is significant and appreciable

Based on observable and measurable changes in prices

Inflation used in formulation of macroeconomic policies

Indicator of economic performance

 Causes of inflation

Over-expansion of money supply

Expansion of bank credit

Deficit financing

Speculation and hoarding

High prices of imports

Monopolies
 Causes of inflation
Continue. . .

Ordinary monetary factors

•High Non-development Expenditure
•Huge Plan Investment
•Black money
•High indirect taxes

Non-monetary factors
•High population growth
•Natural calamities and bad whether
conditions
Measures
Of
Inflation
Inflation is statistically measured in terms of percentage
increase in the price index , as a rate % per unit of time ,
usually in a year or month

Generally the whole sale price index (WPI) are used to

measured the inflation .WPI is an economy wide index
covering the 435 commodities

Alternatively the consumer price index (CPI) or cost of

living index number can be adopted in measuring the rate of
inflation
 WPI
It is an economy-wide index covering 435
commodities.
WPI

primary articles manufactured

prod.
fuel ,power, light, lubricants
 CPI
 CPI-IW – Industrial workers

 CPI-UNME-Urban –non manual employee

 CPI-AL- Agriculture Labour

 CPI-RW-Rural Worker
• The commodity basket for these
indices is derived on the basis of
group- specific consumer
expenditure survey and weight to
each.
Types of Inflation
Causes of DD pull inflation
 Stagflation

• Economic condition in which inflation and economic

stagnation are simultaneous

• Supply shock followed by slowdown in economy

results in inflation

• For eg: increase in the price of oil in an oil importing

country
Hyperinflation
Effects Of
Inflation
Economic effects of inflation:

•Effect on production, that is, changes in the tempo of

economic activity

•Effect on income distribution, that is, re-distribution

of income and wealth

•Effect on consumption and welfare

 Effect on production

Maladjustment

Hindrance to capital accumulation

Speculation

Hoarding and black marketing

Distortion of production pattern

 Effect on production
Continue. . .

Creation of a sellers market

Distortions in resource allocation

Disincentive effect due to income-tax bracket creep

 Effect on income distribution

Debtors and creditors

Business community

Fixed income groups

Investors

Farmers
 Effect on consumption and welfare

Real consumption of common people decline

Rising cost of living

Deterioration in savings

Distortion of the Budget and Vicious Circle

 Effect on consumption and welfare
Continue. . .

Disturbance in the planning

Lowering of international competitiveness

Distortion of the exchange rate

Irrationality of consumption
 Features of
Inflationary Economy
Continuously rising price trend

Money supply is in excess of the requisite production

Over-expansion of credit by the banks

Part of flow of credit is supplied to unproductive

channels

Lack of financial discipline on the part of government

Large number of commodities are short in supply

Artificial scarcity is commonly caused by hoarding
activities

Interest rates in the unaccounted and unorganised sectors

tend to be higher than the organised sectors of the money
market

Labour unrest, strikes, lock-outs are common

Government is trapped in cobweb of an ever-increasing

public expenditure, larger budgets, higher taxes, larger
public debts, huge deficit financing etc.
 Inflation
And
Developing Economy
 List of gaps and bottlenecks

Market imperfections

Capital bottleneck

Entrepreneurial bottleneck

Food bottleneck

Infrastructural bottleneck

Foreign exchange bottleneck

Resources gap
Global Inflation
and
India
Factors playing major role : Imported inflation and Oil
prices

Food price index

Forces behind the rise

Policy neglect

Financial speculators

Implications for India

Ineffective strategy
Control of measures
Fiscal measures

Monetary measures like CRR, SLR, RRR, RR

Supply chain management

Fixing of maximum prices
The system of dual prices
Increase in supply of food grains
Public distribution system
 Conclusion

•If there is inflation in the economy, it

is not good for the economy.
•If there is no inflation in the economy,
it is bad for the economy.