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Inflation



A situation of substantial and rapidgeneral increase in the level of prices and

consequent deterioration in the value ofmoney over a period of time a state in which the value of money isfalling, i.e., prices are rising.



Continuously rising price trend

The money supply is in excess of the requisiteproduction and exchange needs of the economy.

Over-expansion of credit by the banks

Artificial scarcity is commonly caused by hoardingactivities

Lack of financial discipline on the part of thegovernment

A large number of commodities are in short supply.

Interest rates in the unaccounted and unorganized

sectors tend to be higher, than the organizedsectors of the money market.

Labor unrest, strikes,-lock-outs, etc are common.



Measures of inflationWholesale Price Index (WPI)Consumer Price Indices(CPIs)



WPI is the index that is used to measure

the change in the average price level ofgoods traded in wholesale market.

The Indian government has taken WPI asan indicator of the rate of inflation in theeconomy.

The Wholesale Price Index or WPI is theprice of a representative basket ofwholesale goods.



The Wholesale Price Index focuses on the price of goods

traded between corporations, rather than goods bought by

consumers.The purpose of the WPI is to monitor price movements that

reflect supply and demand in industry, manufacturing and

construction.

At present,676 items are used for calculating WPI

WPI Inflation Rate: Jan 2014: 6%



A consumer price index(CPI) measures changesin the price level of a market basket ofconsumer goods and services purchased byhouseholds.

CPI is a fixed quantity price index and

considered by some a cost of living index CPI inflation rate : Jan 9 %
http://en.wikipedia.org/wiki/Market_baskethttp://en.wikipedia.org/wiki/Consumer_Serviceshttp://en.wikipedia.org/wiki/Consumer_Serviceshttp://en.wikipedia.org/wiki/Market_baskethttp://en.wikipedia.org/wiki/Market_baskethttp://en.wikipedia.org/wiki/Market_basket



Bottlenecks and gaps:

Market Imperfections

Capital Bottleneck

Entrepreneurial Bottleneck Food Bottleneck

Infrastructural Bottlenecks

Foreign Exchange Bottleneck



Demand Pull inflation

Cost Push InflationOther causes:Expansion of bank creditDeficit financing

Black moneyHigh non-development expenditureHigh population growthNatural calamities and bad weather conditions

Speculation and Hoarding


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Prices rise in response to an excess of

aggregate demand over existing supply ofgoods and services. Demand pull Inflation might be caused by

an increase in the quantity of money, whenthe economy is operating at full-

employment level. Quantity of money increases rate of interest fallsinvestment increases

Increase the income of the various factors ofproduction aggregate consumption expenditure

will increase an effective increase in the effectivedemand.



Initiated by an increase in costs, as factors ofproduction try to increase their share of thetotal product by raising their prices.

A rise in prices is initiated by growing factor

costs. Therefore, such a price rise is termedas "cost-push" inflation as prices are beingpushed up by the rising factor costs.

Induced by the wage-inflation process Wages of costs of production increase Cost

inflation



Indirect Tax

Menu costs

Variability in relative Prices

Negative Impact on exports Deterioration in Savings

Distortion of the Budget

Disturbance in the planning



Econom ic Effects of Inf lat ion



Effects on Production

Distributional Effects

Effects on Consumption and Welfare



Mild inflation or creeping inflation has a

favorable effect on production when thereare unutilized or under-employed resources. when inflation has reached an advanced

stage, its brighter aspects disappear and theevil aspect manifest themselves like:

Maladjustments Hindrance to Capital Accumulation Speculation Hoarding and Black-marketing Distortion of Production Pattern

Creation of a Sellers' Market Distortions in Resource Allocation, Disincentive Effects Due to Income-tax Bracket

Creep



Income of different classes of earners varies,

which results in serious social consequences Inflation enlarges the money incomes in the hands

of the flexible groups, and adversely affectspeople in the fixed income groups,

Inflation re-distributes income and wealth in favorof businessmen, debtors and farmers butconsumers, creditors, small investors, labor class,middle class and fixed-income groups face

hardships.



Inflation implies an erosion of the consumer's valueof money. It is a form of taxation

Due to deteriorating purchasing power the realconsumption of the common people declines.

Rising cost of living during inflation implies fallingstandard of living and lowering of general economicwelfare of the community at large.



Fiscal measures

Monetary Measures



Products primarily responsible for the

current inflation in India are foodproducts, including cereals, intermediateslike metals and the universal intermediate,oil



Rise in Food price index High oil prices

Impact of oil prices

Impact of government policies in the US,Europe, Brazil and elsewhere

Policy neglect by government

Financial speculators



Deflation - decrease in the general price level of goods and

services. Deflation occurs when the annual inflation rate falls

below zero percent (a negative inflation rate), resulting in an

increase in the real value of money - allowing one to buy moregoods with the same amount of money.

Negative inflation - economy is in a deflationary period.

There is less money (supply of money) chasing the same

amount of goods and services, leading to the increase in the

value of the money.(-1.61June, 2009)

Disinflation- a slow-down in the inflation rate i.e. when

inflation declines to lower level.

Hyperinflation- inflation that is very high or "out of control",a condition in which prices increase rapidly as a currency loses

its value.

E.g - Germany - 100,000,000,000,000 Mark.

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