KARAN Inflation)

8/3/2019 KARAN Inflation)

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Submitted By:-Mohamad Shoab

Kiranjeet Kumar

Yogesh Kumar

Sandeep Kumar

Raj Kishor Singh

Shikha Galav


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CONTENTSCONTENTS

INTRODUCTION

EFFECTS

CAUSES

TYPES OF INFLATION

MEASURES OF INFLATION

RATE OF INFLATION


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INFLATION

Inflation is an economic term.

Inflation means rise in the price ofgoods and services in an economy

over a certain period of time.

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

Inflation -An increase in price


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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 isexpanding more than proportionate to income earning activity

According to Prof. Samuelson: Inflation occurswhen general level of prices & cost are rising


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EXAMPLE:-

A 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 mydads 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.


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TYPES OF INFLATION

1. Creeping Inflation:- In this rise in price is 2.25%. It isbeneficial for economy.

2. Walking Inflation:- Rise in inflation is more than 5% lessthan 10%

3. Running Inflation:- Rise in price is between 10% to 20%.

4. Hyper Inflation:- In this rise may be between 20% to 30%


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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


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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.


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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.


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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.


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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


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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.


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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,

PROBLEMS DUE TO INFLATION


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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.


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IMPACT OF INFLATION ON GENERAL PUBLIC


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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.

MESURE OF INFLATION


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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 pricesof 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.


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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 nextYear 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 inflationof 4% the price go up to (80 x 1.04) = 83.2

RATE OF INFLATION


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A movie ticket was for a few paise in my dads 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 dads 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.

STORY


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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 todays 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.

What is the rate of return?


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RATE OF INFLATION THROUGH GRAPH


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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


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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 alsoknown 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 securities to reduce the inflation.

Current reserve ratio :- It is the percentage of total deposite whichcommercial banks are required to maintain as reserve in the reserve bank of

india. Currently it is 5%.


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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.

CONCLUSION

Inflation is a sustained increase in the general level of prices for goodsand services.

When inflation goes up, there is a decline in the purchasing power of money.

Variations on inflation include deflation, hyperinflation and

stagflation.


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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 interest rates

and real interest rates.

CONT

Two theories as to the cause of inflation are demand-pull inflation

and cost-push inflation


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KARAN Inflation)