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1 Introduction
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 price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of ac in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time. Inflation can have many effects that can simultaneously have positive and negative effects on an economy. Negative effects of inflation include a decrease in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, or may lead to reductions in investment of productive capital and increase savings in non-producing assets. e.g. selling stocks and buying gold. This can reduce overall economic productivity rates, as the capital required to retool companies becomes more expensive. High inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include a mitigation of economic recessions, and debt relief by reducing the real level of debt. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Today, most mainstream economists favor a low steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations and through the setting of banking reserve requirements.
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measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for.
LITERATURE REVIEW
Bicchal, Motilal. Sharma,Naresh Kumar and Kamaiah Bandi Evaluating Core Inflation Measures for India. (2007).In their study they discussed various existing
approaches of measuring core inflation, evaluating their potential advantages and disadvantages. Then a variety of measures of core inflation for India based on three methods are constructed. Among these measures, three are based on conventional ex-food and energy principle and one measure that exclude fifteen of most volatile components are constructed. While constructing exclusion based indices of core inflation, measures are constructed such that only a small weight remains excluded from the index of the core inflation. The other two core measures are variations of Neo-Edgeworthian Index are constructed by reweighting 69 disaggregated components series of WPI. Then another class of core measures are computed based on weighted exponential smoothing which was primarily developed by Cogley (2002). Estimates of core inflation based on their indices are then calculated for 1995 to 2007 (on monthly basis).
Cochrane, John H. Inflation Determination with Taylor Rules: A Critical Review. (2007).The new-Keynesian, Taylor-rule theory of inflation determination relies on
explosive dynamics. By raising interest rates in response to inflation, the Fed does not directly stabilize future inflation. Rather, the Fed threatens hyperinflation or deflation, unless inflation jumps to one particular value on each date. However, there is nothing in economics to rule out hyperinflationary or deflationary solutions. Therefore, inflation is just as indeterminate under active interest rate targets as it is under standard fixed interest rate targets. Inflation determination requires ingredients beyond an interest-rate policy that follows the Taylor principle.
Saad-Filho, Alfredo. Inflation theory: a critical Literature review and a new Research agenda. (2007). Marxian analyses of inflation tend to fall under three broad
categories, those that emphasize primarily the role distributive conflicts, monopoly power, or state intervention on the dynamics of credit money. This article reviews these interpretations, and indicates how they can be integrated. The proposed approach, based on the 'extra money' view, departs from the circuit of capital and the endogeneity of credit money in order to explain inflation in inconvertible paper money systems.
Bleaney, Michael and Francisco, Manuela. Exchange rate regimes and inflation Only hard pegs make a difference. (2007). Previous research has suggested
that pegged exchange rates are associated with lower inflation than floating rates. In which direction does the causality run? Using data from a large sample of developing countries from 1984 to 2000, we confirm that hard pegs (currency boards or a shared currency) reduce inflation and money growth. There is no evidence that soft pegs confer any monetary discipline. The choice between soft pegs and floats is determined by inflation: when inflation is low, pegs tend to be chosen and sustained, and when inflation is high, either floats are chosen or there are frequent regime switches.
Bruno, Michael and Easterly, William. Inflation and Growth: In Search of a Stable Relationship. (2007).Are inflation and growth inversely associated, directly
associated, or not associated? Is the empirical inflation growth relationship primarily a long-run
relationship across ries, a short run relationship across time, or both? Like a bickering couple, inflation and growth just cannot seem to decide what their relationship should be.
Singh,Anushree. Inflation Hits Middle Class. (2008). In his study he stated that
The prices of basic commodities like fuel, food, education and a interest rates on loans for durables are going up. The average Indian is now paying more on their loans as the interest rates on home loans have gone up by 300 points in the past few months. As such the middle
class cannot afford those goods that they had previously been able to, he adds. It adversely effect their life style.
Butel,Christopher.
Inflation
Jeopardizes
Middle
Class
Education
Requirements. (2008). In his study he stated that in longer term, high inflation could also
weaken the private education sector that has been playing a critical role in raising the quality of Indias workforce. More significantly it, has been the route for people to achieve middle class status. Inflation will jack up the expense of private education for which fees already taking up large proportion of household income because of the inability of supply to keep with demand in the private sector. A lot of people will not be able to afford to send their childrens to private schools anymore.
Shah, Jaksha. Indian Middle Class Expenses. (2009).In his study he stated that
middle class is concerned mainly about childrens educations and health of family. High fees do not guarantee good education. In the same way, when someone in the family is ill, doctors, pathologists and chemists are there to make sure the budget of the family gets disturbed.
Trikha, Peeush. Inflation in India and Its Impact on the People. (2009). In his
study he stated that, almost all the Indian states are reeling under high inflation rate-nearly 18% as of the December. Prices of essential items like sugar, pulses, vegetables, fruits as well as cooking oil are under pressure. Electricity charges have also been increased especially in Delhi and water charges are also expected to increase. The Delhi government is doing this to cover some of the expenses for the commonwealth games, to be held in New Delhi in October 2010.Some of these fare rises are justified, since the last raise was quit a number of years ago. However,the timing has put an overwhelming burden on people. Yet, the unexplained ever rising food p[rices is shameful. High prices dent common mens saving, many of whom live on rent, or are aying monthly installments for their homes. They even have to check whether they are spending INR 10 on item X or INR 25 more on item Y. All this leads to a spiraling effect as it becomes more difficult for poor people to improve their conditions and lead a life where they are not devoid of basic amenities like food, water, shelter and sanitation. There is already vast gap between the poor and rich also rises further. It also leads to rise in cases of burglaries, theft and 10
related crimes, while there are the dynamics of demand and supply in this case of ever rising inflation, there is also a lack of planning and lack of will to act against hoarders and middlemarket man who inflate prices many a times to make big profits and cheat others. Let us hope that Indian central as well as state governments take strong steps tackle this rising inflation and keep it within suitable limits.
Rana, MP. Inflation Affecting Middle Class Spending Patterns. (2011). In his
study he discussed that the middle class has been hard hit by the rising inflation, a survey titled "Impact of Inflation among the middle class" conducted by Assocham said that the group had curtailed its spending on entertainment, shopping and eating out by 65 per cent to manage their monthly budgets. The Survey was conducted in major metropolitan cities such as Delhi, Mumbai, Chennai, Kolkata, Ahmedabad, Hyderabad, Pune, Chandigarh and Dehradun. The Survey also noted the bitter fact that the double digit inflation did not affect the higher income group as it did not affect their earnings and thereby spending. According to the survey, the average middle class household in India spent roughly 4000 to 6000 rupees per month on entertainment, shopping and eating out which it has been forced to reduce to Rs 2500 due to the rising market prices. On the other hand, the average amount of money that the high income group spent on entertainment, shopping and eating out during the period of single digit inflation
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was Rs 10,000 to 20,000 per month which remained unchanged even during the times of double digit inflation. The people in Delhi were the most hit with inflation followed by Ahmedabad, Chandigarh, Mumbai and Chennai. Roughly 500 people from each of the metropolitan cities were picked up for the survey.
RESEARCH METHODOLOGY
3.1 RESEARCH
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Research is a way to systematically solve the research problem. The research methodology includes the various methods and techniques for conducting a research.
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robber. It deprives the victim of some possession with the difference that robber is visible, inflation is invisible. The robber's victim may be one or a few at a time. But the victim of inflation is the whole nation. The robber may be dragged to a court of law but inflation is legal. Inflation disrupts the economy and paves the way for social and economic upheavals, besides being highly demoralizing. The entrepreneur faced with the demand for higher wages and trying to keep up with such a demand, a retired person trying to manage his living on a fixed pension, a person with fixed income meeting his needs of household expenditure by borrowing from banks and other financial organizations, and the housewife struggling hard to serve food in a period of rising prices are aware of the effects of inflation without being told about it. Effects of inflation on distribution: Inflation has the effect of redistributing income because prices of all factors do not in the same proportion. Entrepreneurs stand to gain more than wage earners or fixed income groups. Speculators, hoarders, black marketers and smugglers gain on account of windfall profits. Change in the value of money also result in the redistribution of wealth, partly because during inflation there is no uniform rise in prices and partly because debts are expressed in terms of money. Inflation is a kind of hidden tad, highly harmful to the poorer sections of society. Thus, poor become poorer. Effects of inflation on wage earners: Wage earners generally suffer during inflation, despite the fact that they obtain a wage rise to counter the rise in the cost of living. However, wages do not rise as much as the rise in price of those commodities, which the workers consume. Further, wages are allowed to rise much later than the rise in prices. Thus, there is a lag between the two, which works to the disadvantage of the worker. If the workers are organized, they may not suffer much during inflation but if they are unorganized like the agricultural laborers they may suffer more as they may not find it easy to get their wages increased. Effects of inflation on middle class and salaried persons: The hardest hits are the persons who receive fixed income, usually called the middle class. Persons who live on past savings, fixed interest or rent, pensions, salaries etc., suffer during periods or rising price, as their incomes remain fixed. The middle class who by hard work take care of children's education, livelihood in
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the times of sickness and old age and accommodate day to day expenses find it difficult to survive the times of serious inflation. Effects of inflation on public morale: inflation result in arbitrary redistribution of wealth favoring businessmen and debts, and hurting consumers, creditors, petty shop-keepers, small investors and fixed income earners. This lowers the public morale. The ethical standards and the public morale fall to miserably low levels during the period of hyperinflation. Effects of inflation on debtors and creditors: Debtors borrow from creditors to repay with interest at some future date. Changes in price level affect them differently at different time periods. During inflation when the prices rise and the real value of money goes down, the debtors pay back less in real terms than what they had borrowed and thus, to that extent they are gainers. On the other hand, the creditors get less in terms of goods and services than what they had lent and lose to that extent. Effects of inflation on Farmers: The prices of farm products go up faster than costs. Costs lag behind prices of product received by the farmers. It has been observed in India that inflationary tendencies during war and post-war periods have helped farmers in paying off their old debts. Moreover, farmers are generally debtors and have to pay less in real terms, while the land revenue, taxes, etc., do not rise much. Thus farmers generally gain during the periods of inflation. Effects of inflation on the entrepreneurs: When prices rise, producers, traders, speculators and entrepreneurs gain on account of windfall profits because prices rise at a faster rate than the cost of production. Besides, there is time lag between the price rise and the increase in cost. Moreover producers gain because the prices of their stock go up due to inflation. Also they generally being borrowers of money for business purpose, stand to gain. Effects of inflation on Investors: Different kinds of investors are affected differently by inflation. An investor may invest in bonds and debentures which yield a fixed rate of interest or in real estate or equities (shares) whose returns (dividends) rise and fall with profits earned by
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the companies concerned. When prices rise, the returns on equities go up on account of the rise in profits, while the bond and debenture holders gain nothing, as their income remains fixed. By the same logic, holders will lose during depression, while the debenture and bondholders gain. Effects of inflation on Government: In a mixed economy, the public sector is affected by fluctuations in price level. As prices rise, the Government has to spend more on goods and services, including raw materials, for carrying through their projects. Estimates are revised and taxes are raised during the period of inflation.
Another factor to be aware of is how uneven inflation can be. Education costs in both the USA and in India have far outpaced average inflation for many years. This is very important while planning your childs higher education, whether in India or abroad. Food prices worldwide also come under the higher inflation rates (for November increase was 19% as per the Economic Times of Dec 14) Retirement is a key area to watch out for. One needs to save large amounts & save early to get the retirement benefits to support in old age. The era of company-offered pensions is declining and one needs to take care of himself/herself. Even those persons with a pension will soon find its value eroding if the pension amount is fixed but the economy is not. Whatever is the strategy used, one needs to be aware of the inflation rate and make sure he/she is keeping up with it, if not surpassing it, in their investments and other earnings.
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SUGGESTIONS:
RBI needs to adopt monetary measures for controlling inflation like increasing the discount rate higher reserve ratio, open market operations and selective credit control.
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The government should reduce public expenditure or increase public revenue to keep a check on inflation. There is need to stop corruption. Export duties imposed on various items need to be reduced. Hoarding of basic commodities like food: vegetables, pulses; fuel etc should be stopped. Public expenditure should be reduced and savings need to be encouraged. Conservative policy is to be followed by RBI. Bank rate need to be increased, control the flow of money in the economy.
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Highlighting the fact that the middle class has been hard hit by the rising inflation, a survey titled \"Impact of Inflation among the middle class\" conducted by Assocham said that the group had curtailed its spending on entertainment, shopping and eating out by 65 per cent to manage their monthly budgets. The Survey was conducted in major metropolitan cities such as Delhi, Mumbai, Chennai, Kolkata, Ahemedabad, Hyderabad, Pune, Chandigarh and Dehradun.
The Survey also noted the bitter fact that the double digit inflation did not affect the higher income group as it did not affect their earnings and thereby spending. According to the survey, the average middle class household in India spent roughly 4000 to 6000 rupees per month on entertainment, shopping and eating out which it has been forced to reduce to Rs 2500 due to the rising market prices. On the other hand, the average amount of money that the high income group spent on entertainment, shopping and eating out during the period of single digit inflation was Rs 10,000 to 20,000 per month which remained unchanged even during the times of double digit inflation.
The people in Delhi were the most hit with inflation followed by Ahemedabad, Chandigarh, Mumbai and Chennai. Roughly 500 people from each of the metropolitan cities were picked up for the survey.
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Abstract
Over the last one decade inflation in India has been due mostly to oil price shocks or below normal harvests; only in 200607 did aggregate demand pressure seem to play a role in raising the general price level. Inflation originating in supply shocks is generally transitory and represents a movement from one equilibrium price level to another. Only when aggregate demand exceeds the economy's production potential and the monetary policy is accommodative can inflation be of a continuing nature. The two types of inflation call for quite different policy responses. Anti-inflationary fiscal or monetary measures are required when there is an excess demand situation, not when there is a sectoral shock. Nor are policies like oil price freeze or cuts in customs-cum-excise duties on cement or metals appropriate for containing an increase in the general price level: such measures are distortionary and counterproductive in as much as they reduce the country's full employment output and growth potential. Only in the case of shortage of food and other essential items of poor men's consumption is it necessary to undertake supply side management through reliance on PDS as well as open market sale of foodgrains by FCI. The purpose of the present paper is to examine the nature of supply and demand side factors causing inflation in the Indian economy and the efficacy of alternative anti-inflationary measures. In order to motivate the discussion we summarize in Section I the main features of two recent inflationary episodes with special reference to their official diagnosis and the policies pursued to reduce the price pressure. In the context of this survey we pose in Section II some theoretical and policy issues which appear important, but do not seem to have been properly addressed. Sections III to V attempt at a resolution of
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these issues and provide in the process a critique of the anti-inflationary policy response of the fiscal and monetary authorities. The final section concludes.
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Submitted by: sonujaiswal Date Submitted: 07/01/2010 Category: Business Words: 3584 Pages: 15 Views: 1271 Popularity Rank: 1138
INFLATION IN INDIA: A THREAT TO THE ECONOMY * Om Prakash Jaiswal ABSTRACT Currently India is under intolerable pressure of mounting inflation having one of the highest consumer inflation in the world. Consumer price index stood at 13.19 in Sep. 2009. Price rise has created serious problem such as discourage investment, loss confidence in domestic currency, and hindering growth of country and causing disappointment in the economy etc. Economic having opinion that inflation today is also caused by global factor beside domestic factors. India is continuously paying the price for not having long term strategy to tackle inflation. Inflation in India is emerging major threat to the economy. This paper explains in detail about inflation in India with defining it and adds types of inflation, trends of inflation, myth about the inflation and critically evaluates the steps taken by the government to control inflation. Further this paper investigates the causes and effects of inflation to various groups of society and exploring solutions to check inflation.
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The RBI is attempting to suck out liquidity through mkt operations and an expected CRR hike, but will it be enough? Worse we are importing US inflation by holding the Rupee to the dollar at close to Rs40. Read Ilas post on dollar purchase by RBI and watch Ajay Shah for his excellent analysis on Worldwide Inflation of commodities. Things are going to be interesting, and markets fragile. I think sooner than later the Property markets will also start to correct by a fair bit.
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