Submitted By:Mohamad Shoab Kiranjeet Kumar Yogesh Kumar Sandeep Kumar Raj Kishor Singh Shikha Galav

CONTENTS
INTRODUCTION TYPES OF INFLATION CAUSES EFFECTS
MEASURES OF INFLATION

RATE OF INFLATION

INFLATION
Inflation is an economic term. Inflation means rise in the price of goods and services in an economy over a certain period of time.
Inflation -An increase in price

In inflation value of money is decreased. When purchasing power of money is decreased then that situation is Known as inflation. When supply of money increased in the market then it brings inflation

DEFINITIONS:
According to Crowthers:
Inflation means a state in which the value of money is falling i.e. prices are rising

According to Pigou:

Inflation arises when money income is expanding more than proportionate to income earning activity

According to Prof. Samuelson: Inflation occurs

when general level of prices & cost are rising

EXAMPLE:person would like to buy 5 kgs of apple with Rs. 100, at the present rate of inflation, say, zero. Now when the inflation rate is 5%, then the person would require Rs. 105 to buy the same quantity of apples. This is because there is more money chasing the same produce.

ANOTHER EXAMPLE:-

A movie ticket was few a rupees in my

dad s time. Now its cost is worth Rs 50. The cost of movie ticket has been increased because inflation increases the price any goods and services.

TYPES OF INFLATION
1. Creeping Inflation:beneficial for economy.
In this rise in price is 2.25%. It is

2. Walking Inflation:than 10%

Rise in inflation is more than 5% less

3. Running Inflation:4. Hyper Inflation:-

Rise in price is between 10% to 20%.

In this rise may be between 20% to 30%

FEATURES OF INFLATION
 Increase of price should be significant.  It is a continuous process for some consecutive years  Increase in the general price level rather than one commodity or sector  It is occurred in a particular period of time.  It is the key indicator of the economy of any country.  It reduces the purchasing power of the money

DEFLATION
It is also an economic term. It is just opposite of inflation. In deflation value of money is increased. Purchasing power of money is also increased. In deflation price of goods and services is decreased. Supply of money is decrease in the market.

CAUSES OF INFLATION
When the government of a country print money in excess, prices increase to keep up with the increase in currency, leading to inflation.

Increase in production and labuor costs, have a direct impact on the price of the final product, resulting in inflation.

When countries borrow money, they have to cope with the interest burden. This interest burden results in inflation.

CONT

High taxes on consumer products, can also lead to inflation.

Demands pull inflation, wherein the economy demands more goods and services than what is produced.

Cost push inflation or supply shock inflation, wherein non availability of a commodity would lead to increase in prices.

When circulation of money is increased, it leads inflation.

EFFECTS OF INFLATION
Increase in prices of goods and services this the most visible effect for

the general public.

Decrease in real income.

Income of general public remain same but expenses is increased.

Decrease in the value of investments especially affecting people with fixed income such as pensioners

CONT
It can lead to a wage spiral people will demand higher wages to cope with increased prices, and increased wages will push the prices further up.

Lowers the domestic saving rate since people prefer to spend the money rather than watch it diminish in value.

When inflation becomes very acute, It may results a very dangerous situation for the economy.

PROBLEMS DUE TO INFLATION

When the balance between supply and demand goes out of control, consumers could change their buying habits, forcing manufacturers to cut down production.

The mortgage crisis of 2007 in USA could best illustrate the ill effects of inflation. Housing prices increases substantially from 2002 onwards, resulting in a dramatic in demand.

Inflation can create major problems in the economy. Price increase can Worsen the poverty affecting low income household,

CONT

Inflation creates economic uncertainty and is a dampener to the investment climate slowing growth and finally it reduce savings and thereby consumption.

The producers would not be able to control the cost of raw material and labor and hence the price of the final product. This could result in less profit or in some extreme case no profit, forcing them out of business.

Manufacturers would not have an incentive to invest in new equipment and new technology.

IMPACT OF INFLATION ON GENERAL PUBLIC

MESURE OF INFLATION
India uses the Wholesale Price Index (WPI) to calculate the inflation rate.

Most developed countries use the Consumer Price Index (CPI) to calculate inflation as this actually measures the increase in price that a consumer will ultimately have to pay for.

Presently 145 Countries practice CPI compared to 27 practicing WPI.

Wholesale Price Index (WPI)

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI.WPI is now available on a monthly basis.

Consumer Price Index (CPI)

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

RATE OF INFLATION
By how much do the prices go up? At what rate do the prices go up? The rate at which the prices of everything goes up is called the "rate of inflation".

For example:- if the price of something is Rs.100 this year and next
Year the price becomes approximately Rs.104 then the rate of inflation is 4%. If the price of something is Rs.80 then after a year with a rate of inflation of 4% the price go up to (80 x 1.04) = 83.2

STORY
A movie ticket was for a few paise in my dad s time. Now it is worth Rs.50. My dads first salary for the month was Rs.400 and over the years it has now become Rs.75,000. This is what inflation is, the price of everything goes up. Because the price goes up, the salaries go up. If you really thing about it, inflation makes the worth of money reduce. What you could buy in my dad s time for Rs.10, now a days you will not be able to buy for Rs.400 also. The worth of money has reduced! If this is still not clear consider this, when my father was a kid, he used to get 50paise pocket money. He used to use this money to go and watch a movie (At that time you could watch a movie for 50paise!) Now, just for the sake of understanding assume that my dad decided in his childhood to save 50paise thinking, that one day when he becomes big, he will go for a movie. Many years passed. The year now is 2006. My dad goes to the theater and asks for a ticket. He offers the ticket-booth-guy at the theater 50paise and asks for a ticket. The ticket booth guy says, I am sorry sir, the ticket is worth Rs.50. You will not be able to even buy a paan with the 50paise!! at current time.

What is the rate of return?

The rate of return is how much you make on an investment. Suppose you invest Rs.100 in the market and over a year, you make Rs.120, then you rate of return is 20%. If you invest Rs.100 in the market today and you make money at a 3% "rate of return" in one year you will have Rs.103. But now, since the rate of inflation is at 4%, an item costing Rs.100 today will cost Rs.104 a year from now. So what you can buy with today s Rs.100, you will only be able to buy with Rs.104 a year from now. But the Rs.100 that you invested has grown only at a 3% rate of return and so it is worth Rs.103. In effect, you are loosing money! So in conclusion, the rate of return on your investments, have to be higher than the rate of inflation.

RATE OF INFLATION THROUGH GRAPH

MONTHLY INFLATION RATE OF 5 CONSECUTIVE YEARS

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010

14.22

16.86

13.33

13.91

13.73

11.25

9.88

9.82

9.70

2009

10.45

9.63

8.03

8.70

8.63

9.29

11.89

11.72

11.64

11.49

13.91

14.97

2008

5.51

5.47

7.87

7.81

7.75

7.69

8.33

9.02

9.77

10.45

10.45

9.70

2007

6.72

7.56

6.72

6.67

6.61

5.69

6.45

7.26

6.40

5.51

5.51

5.51

2006

4.39

5.31

5.31

5.26

6.14

7.89

6.90

5.98

6.84

7.63

6.72

6.72

MEASURES TO CONTROL THE INFLATION

The measures to control the inflation is used by the Reserve Bank of India.

 Bank rate :- To control the inflation RBI hikes the bank rate . It is also
known as bills of exchange. It is the rate at which reserve bank of India discounted the bill of exchange which is presented by the commercial banks. Now current bank rate is 10%.

 Open market :- Government sales the

 Current

securities to reduce the inflation.

It is the percentage of total deposite which commercial banks are required to maintain as reserve in the reserve bank of india. Currently it is 5%.

reserve ratio :-

CONCLUSION
After reading some thing about inflation, you should have some insight into inflation and its effects. For starters, you now know that inflation isn't intrinsically good or bad. Like so many things in life, the impact of inflation depends on your personal situation.

 Inflation is a sustained increase in the general level of prices for goods

and services. When inflation goes up, there is a decline in the purchasing power of money. Variations on inflation include deflation,

hyperinflation and

stagflation.

CONT
 Two theories as to the cause of inflation are demand-pull and cost-push

inflation

inflation

 Lack of inflation (or deflation) is not necessarily a good thing.  Inflation is measured with a price index.  In the long term, stocks are good protection against inflation.  Inflation is a serious problem for fixed income investors. It's important to understand the difference between nominal and

interest rates

real interest rates.