Topic

Inflation
Presented by: Submitted to:

 Jannatul Ferdous Prof Dr. Md. Aftarauzzaman khan

 Mst. Fahima Akter Chowdury.
 Md. Saidur Rahman
 Dharitry Roy
 Kh. Sajidur Rahman
 Zerin Tasneem Zeem
 Md. Sakib Hossain
 Overview of topics
 Defination and impact inflation
 Categories of inflation
 Modern inflation theory
 Dilemmas of Anti-inflation policy
 Measurement of inflation
 Inflationary GAP
 Analysis of inflationary pressure
 Anti-inflationary measures
 Conclusion
Definition and Impact Inflation
When the general level of price is rising then it called inflation.
By using price indexes inflation is calculated.

The rate of inflation is the percentage change in a price index

from one period to the next. The major price indexes are the
consumer price index(CPI) and the GDP deflator.

The GDP deflator is the price of GDP.

 Rate of inflation
The rate of inflation is the percentage change in the price level.

If P0 is the current average price level and P− 1 is the price level

a year ago, the rate of inflation during the year might be
measured as follows:
P0 – P-1
Inflation rate = ------------------ x 100
P-1
 Categories of Inflation
There are three types of inflation

• Low inflation
• Galloping inflation
• Hyper inflation
 Low inflation

Low inflation is characterized by prices that rise slowly

and predictably . We can define as single digit annual
inflation rates or when the prices of goods and services
do not increase rapidly its called low inflation.

Most industrial countries have experienced low inflation

over the last decade.
 Galloping inflation
According to Samuelson, when prices are rising at in the
double, or triple-digit range of 10, 100, or 200 percent, is called
“galloping inflation.”

In these conditions, money loses its value very quickly, so

people hold on to only the bare-minimum amount of money
needed for daily transactions.

Argentina, Brazil and Israel, for instance, have experienced

inflation rates over 100 per cent in the eighties. Galloping inflation
is really a serious problem. It causes economic distortions and
disturbances.
 Hyperinflation
Hyperinflation takes over when the printing presses
spew out currency and prices start rising many times
each month. Historically hyperinflations have almost
always been associated with war and revolution.

In 1922, inflation in Austria reached 1426%. From 1914

To January 1923, the consumer price index rose by a
factor of 11836. With the highest banknote in
denominations of 500,000.
 Hyperinflation

Sweeping up the banknotes from the street after the Hungarian

pengő was replaced in 1946
 Modern inflation theory
The inertial rate of inflation is a short-run equilibrium and
persists until the economy is shocked. Inflation affects the
economy by redistributing income and wealth and by
impairing efficiency. It hurts creditors, fixed-income
classes and timid investors.
 Inertial inflation
 Demand pull inflation
 The Phillips curve
 Cost push inflation
 NAIRU Inflation
 Inertial inflation
In modern industrial economies inflation has great
momentum and tends to persist at the same time. This
expected rate of inflation was build into the economy’s
institution. Wage agreements between labor and
management were designed around this rate, government
monetary and fiscal plans assumed this rate.
 Demand Pull Inflation
Demand Pull Inflation
Potential Output
Demand Pull Inflation occurs
Qp
AS when aggregate demand rise faster
than the economy’s productive
potential
Price Level

P1
AD1

P
AD

Real Output
 Cost Push Inflation
Cost Push Inflation

AS1 Cost Push Inflation occurs

AS when there is a shock to the
aggregate supply curve, shifting it to
the left.
Price Level

P1
P
AD

Real Output
 The Phillips Curve
The Phillips curve shows the relationship between inflation and
unemployment. In the short run, lowering one rate means raising
the other. But the short-run Phillips curve tends to shift over time
as expected inflation and other factors change.

Inflation affects the economy by redistributing income and wealth

and impairing efficiency.

It hurts creditors, fixed-income classes, and timid investors.

 The NAIRU Cruve
Modern inflation theory on the concept of the non accelerating of inflation
rate of unemployment, or NAIRU, which is the lowest sustainable
unemployment rate that the nation can enjoy without risking an upward
spiral of inflation. It represents the level of unemployment of resources at
which labor and product markets are in inflationary balance. Under the
NAIRU theory, there is no permanent tradeoff between unemployment and
inflation, and long-run Phillips curve is vertical.

Inflation leads to distortions in relative prices, tax rates, and real interest
rates.
When central banks take steps to lower inflation, the real costs of such steps
in terms of lower output and employment can be painful.
 Dilemmas of Anti-inflation Policy
A central concern for policymakers is the cost of reducing
inertial inflation. Current estimates indicate that a
substantial recession is necessary to slow inertial inflation.

Economists have put forth many proposals for lowering

NAIRU, notable proposals include improving labor market
information, improving education and training programs,
and refashioning government programs so workers have
grater incentives to work.
 Measurement of inflation

In measuring inflation, the quantity type of measurement

is replaced by Keynes through the introduction of a new
concept-the inflationary gap.
 Inflationary Gap
The inflationary gap for the economy as a whole maybe
defined as an excess of anticipant expenditures over available
output at base prices.

If Real GDP is greater than Natural Real GDP, the economy

is in an inflationary gap.
– Example:
• Natural Real GDP is $13,000 billion
• Equilibrium Real GDP is $13,500 billion
• The economy is in an inflationary gap.
 Inflationary Gap cont.

C=Y
E`
C`+I`
E
C+I

45’

O
GNP Y Y`
Analysis of Inflationary Pressure
Inflationary pressure arises from both the demand side
and supply side. Demand here means the demand of
money income for things while supply means available
output for which money income can be spent. Thus
factor causing inflationary pressure fall into two groups:

• A) Demand side
• B) Supply side
 Demand side

On the major inflationary forces are:

» The money supply

» Disposable income
» Consumer expenditure and business
outlays
» Foreign demand
 Supply side
The factors affecting supply of goods and services are
the following:

» Full employment and bottlenecks,

» An exports surplus,
» Wage price surplus,
» Expectation regarding future movement of
price.
 Anti-inflationary messures
These measures aim at curing inflation. The cure lies in
removing causes if inflation i.e removing inflationary
pressure from the economy. Inflation therefore, should be
attacked on two fronts-on demand front and supply front.

There lines of action are commonly followed to combat

inflation:
 Monetary
 Fiscal
 Other meassures.
 Monetary measure
These consist in income steps to reduce the existing
supply of money to relive pressure on prices due to
excess income . The important steps are:

Control of note issue-

Control of credit
Over valuation of currencies
Freezing of assets-
 Fiscal measures
A fiscal measure with respect to inflation includes all
the measures of a monetary nature which the government
adopts in connection with-

 Taxes and
 Government expenditures
 Public borrowing
 Other measures
Other measures are :

 Output adjustment
 Wage policy
 Price control and rationing
 Control over speculation
 Conclusion
Inflation's effects on an economy are manifold and can be
simultaneously positive and negative. 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.