Inflation can be defined as a rise in the general price level and therefore a fall in the value of money.

Inflation occurs when the amount of buying power is higher than the output of goods and services. Inflation also occurs when the amount of money exceeds the amount of goods and services available.
1

Consumer Price Index

The CPI is a measure of

Producer Price Index

The price at which a good is

the price of a set group of goods and services. The "bundle, contains items such as food, clothing, gasoline, and even computers. The amount of inflation is measured by the change in the cost of the bundle

sold to other businesses before the good is sold to a consumer. The PPI actually combines for three types of goods: crude, intermediate and finished. The markets are most concerned with the finished goods because these are a strong indicator

PRICE PERCEPTION INDEX

In the mind of citizens there is a Price perception Index which is based on prices paid. And even when inflation comes down , prices paid are higher.

This price perception has two dimensions

1.The consumer is concerned about the proportionate increase in prices over a period of time. Between June 2007 and June 2010, the consumer price index for industrial workers increased by 35 % , while whole sale price index for food articles also rose by 35 %. Thus, what costs Rs 100/- three years ago now costs Rs 135/. 2.The consumer is worried about the increase in price level in relation to his money income . Between June 2007 and June 2010 consumer price for cereals, pulses ,vegetables oils, meat, eggs and fish, milk, spices, vegetables and fruits increased by 30 to 50 %. For a large number of people money income does not increase any where near as much.

TYPES OF INFLATION
1.Creeping inflation - When there is a general rise in prices at very
low rates, which is usually between 2-4 percent annually, this is known as creeping inflation.

2.Trotting inflation - When the percentage has risen

from 5 to almost percent. At this level it is a warning signal for most governments to take measures to avoid exceeding double digit figures.

3. Galloping inflation - Where the rate of inflation is increasing at a noticeable speed and at a remarkable rate, usually from 10-20 percent. 4. Hyper inflation When the inflation rate rises to over 20% it is
generally considered as hyper inflation and at this stage it is almost uncontrollable because it increases more rapidly in such a little time frame.

CAUSES OF INFLATION
Inflation comes in different forms and those at are familiar with the economic matters would observe that there are trends in the way that prices are moving gradual and irregular in relation to aggregate sections of the economy.
This suggest that there is more than one factor that causes inflation and as different sections of the economy develop it gives rise to different types inflationary periods

 Demand-pull inflation occurs when the consumers,

businesses or the governments demand for goods and services exceed the supply; therefore the cost of the item rises
The supply of money The increase of wages More disposal income Aggregate spending The excessive demand

 Cost-push inflation is caused by an increase in

production costs. It is generally caused by an increase in wages or an increase in the profit margins of the entrepreneurs.
The increase of wages The basic cost of living has increased To increase their profit

 Monetary inflation occurs when there is an excessive supply

of money. It is understood that the government increases the money supply faster than the quantity of goods increases, which results in inflation.
As the supply of goods increase the money supply

has to increase or else prices actually go down. When a dollar is worth less because the supply of dollars has increased, all businesses are forced to raise prices just to get the same value for their products.

 Planned inflation that is caused by a government's

monetary policy is called structural inflation. This type of inflation is not caused by the excess of demand or supply but is built into an economy due to the governments monetary policy.
lack of Capital, foreign exchange, land and

infrastructure. Institutional factors like land-ownership, technological backwardness and low rate of investment in agriculture.

 When the inflation of goods and services from foreign

countries that are experiencing inflation are imported and the increase in prices for that imported good or service will directly affect the cost of living.
When overseas firms increase their prices

Another way imported inflation can add to

our inflation rate is when overseas firms increase their prices and we pay more for our goods increasing our own inflation.

EFFECT OF INFLATION
Inflation can have positive and negative effects on an economy. Negative effects of inflation include loss in

stability in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, and 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. Most effects of inflation are negative, and can hurt individuals and companies

NEGATIVE EFFECTS ARE:

Hoarding Distortion of relative prices Increased risk Income diffusion effect Existing creditors will be hurt Fixed income recipients will be hurt Increased consumption ratio at the early stages of inflation Lowers national saving Illusions of making profits Causes an increase in tax bracket Causes mal-investment Causes business cycles Currency debasement Rising prices of imports

POSITIVE EFFECTS ARE :

It can benefit the inflators It be benefit early and first recipients of the inflated money It can benefit the cartels It might relatively benefit borrowers who will have to pay the same

amount of money they borrowed (+ fixed interests), but the inflation could be higher than the interests, therefore they will be paying less money back. A low steady rate of inflation, low inflation may reduce the severity of economic recessions . Tobin effect argues that: a moderate level of inflation can increase investment in an economy leading to faster growth or at least higher steady state level of income. The first three effects are only positive to a few elite, and therefore might not be considered positive by the general public.

METHODS TO CONTROL INFLATION

A high inflation rate is undesirable because it has negative consequences. However, the remedy for such inflation depends on the cause. Therefore, government must diagnose its causes before implementing policies. MONETARY POLICY Inflation is primarily a monetary phenomenon. Hence, the most logical solution to check inflation is to check the flow of money supply by devising appropriate monetary policy and carefully implementing such measures Central banks generally use the three quantitative measures to control the volume of credit in an economy, namely: 1. Raising bank rates 2. Open market operations and 3. Variable reserve ratio

WHO IS AFRAID OF PRICE RISE ?

Inflation is in the news Double digit inflation persists concentrated in prices of food and necessities. The retail prices of pulses are in the range of Rs 80-100 per kg. Seasonal vegetables retail at Rs 30-40 per kg. Yet our pink news papers believe there is little reason for concern. There is a boom in purchases of consumer durables .The middle class is prospering. The poor are better of with NREGA- National Rural Employment Guarantee Act. And people are no longer afraid of inflation. Such a world view is misleading and needs reality check. It would be a serious mistake for the government to conclude that people are now willing to live with higher inflation or that their tolerance is greater than before. Their silence does not means acceptance. It just that they do not have a voice.

INFLATION DECLINES TO 8.5%ON NEW BASE YEAR