Inflation

Parag Rastogi
PGPABM
2008-10
Contents

 What is inflation
 Types of inflation
 Causes of inflation
 Impacts of inflation
 Control measures
 Thank you
What is Inflation

In Goulborn’s words, it is a case of “too much money chasing too

few goods”.
H.G. Johnson defines inflation as “a sustained rise in prices”.

A situation when general price level is increasing consistently.

General price level refers to prices of all commodities taken

together in form of some index.

Inflation thus, represents a situation whereby the pressure

of aggregate demand for goods and services exceeds the
available supply of output.
Inflation –calculation in India
In India inflation is measured on Whole-sale price index.
The main component of it are

 Manufacturing sector 63.75%

 Fuel, power, light and lubricants 14.23%
 Primary articles- 22.02%

 The formula used is:

I = ∑(I i x W i) / ∑ Wi
 Where I = Index Number of wholesale prices of a sub-
group/group/major group/All commodities, Wi = the weight
assigned to the ith item/sub-group/group/major group.
Ii = Index of the ith item/sub-group/group/major group
Contd.
 The weights of the items are based on the value of
transactions which consist of:
• value of estimated marketed surplus in the case of
agricultural commodities and value of products for sale in the
case of non-agricultural products;
• total value of imports, including import duties; and
• total value of excise duty.

 Weights have been assigned on the basis of the entire

wholesale transaction in the economy.

 The value of transactions of non-selected commodities has

been assigned to the selected items on a pro rata basis.
Types of Inflation
 Demand pull

 Cost push

On the basis of intensity

 Creeping

 Walking

 Running

 Galloping
Causes of Inflation
 Inflation may result form an increase in the costs of production.

 The activities of hoarders and speculators reduce the supply of

goods to the market and push up prices

 Inflation may occur if the government of a country prints money

in excess that what is actually required, to deal with financial
emergencies

 The national debts and international lending may also lead to

inflation.
Contd.
 A serious fall in the exchange rate may also be cited as a
cause of inflation

 The prevalence of black money or unaccounted money and

also the existence of counterfeit money lead to inflation.

 Planning for rapid economic development is another cause of

inflation. Huge investments are made which would yield
results only after a period of five to ten years. This very long
time lag between input and output results in inflation.
Impact of Inflation

 Debtors gain and creditors stand to lose by inflation

Necessities become dearer

 When prices rise, producers, speculators and entrepreneurs

gain because prices rise at a faster rate than the cost of
production

 Property owners are benefited on account of increasing

property value.
Contd.
 The hardest hit are those who earn fixed income. Persons who live on
post office savings, fixed interest and rent, pensioners, govt. employees
and so on suffer because their incomes do not rise in proportion to rise in
prices Purchasing power is lowered

 Distortion in production and allocation of resources take place since

producers prefer to produce good consumed by the rich people.

 Inflation results redistribution of wealth favouring businessmen and hurting

consumers, creditors, small investors and fixed income earners.
Control measures

 Monetary measures
 Fiscal measures
 Physical or Non-monetary measures

 The monetary and fiscal measures will reduce the money

supply in the country, whereas the physical and non-monetary
measures will increase output and control prices of goods.
Monetary Measures
 The Reserve Bank of India can increase the market rate of interest that
will reduce the aggregate spending.

 RBI reduces the cash available to the banking system, the capacity of the
banks to lend money to the borrowers will be reduced.

 The RBI can sell the Government securities to the banks or to the public
so that cash available with bank or public can be reduced.

 Consumer credit control can reduce money supply.

Fiscal Measures

 Reduction of government spending

 Imposition of new taxes

 Encouragement of savings or introducing compulsory saving

schemes
 Physical Measurers

 Increasing output, increasing imports and decreasing exports so

as to increase the availability of goods which are in short supply.

 Controlling money wages to keep down costs.

 Price control and rationing.

 Control over speculation, hoarding and black-marketing.

 Import of essential commodities and distribution of such goods

through fair price shops
Thank You