INFLATION AND ITS TRENDS IN INDIAN ECONOMY

BY G.G.N.SRAVANI (131FC01016)

In a simple way to define inflation is “An increase in the price you pay for goods”

(OR) “Decline in the purchasing power of your money”

INFLATION MEANS

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.

What is Inflation

PRICE INFLATION MONETRY INFLATION

TWO SIDES TO INFLATION

It is an increase in the money supply which generally results in price inflation.  This acts as a “hidden tax” on the consumers in that country and is the primary cause of price inflation.

MONETARY INFLATION

An increase in the price of a standardized good/service or a basket of goods/services over a specific period of time (usually one year). Because the nominal amount of money available in an economy tends to grow larger every year relative to the supply of goods available for purchase, this overall demand pull tends to cause some degree of price inflation. 

PRICE INFLATION MEANS

Creeping inflation

Trotting inflation

Galloping inflation

Hyper inflation

Types of Inflation

Three Causes of Inflation

The first cause is called demand-pull inflation. This occurs when demand for a good or service rises, but supply stays the same. Buyers become willing to pay more to satisfy their demand. Demand-pull inflation can be accompanied by irrational exuberance .

The second cause is cost-push inflation. It starts when the supply of goods or services is restricted for some reason, while demand stays the same. When the supply of labor is not enough to meet demand, it can create wage inflation. In the past, inflation in prices generally led to wage inflation, so that companies could retain good workers. However, competition from technological alternatives (such as robotics) and lower-income countries means that wages haven't kept up with prices. Higher prices combined with stagnant wages means your standard of living has decreased. It's another reason for income inequality in the U.S.

The third cause is overexpansion of the money supply. That's when a glut of capital in the market chases too few opportunities. It's often a result of expansive fiscal or monetary policy, creating too much liquidity in the form of dollars or credit.

Rise in Crude oil prices

Rise in Food prices

Black Money

GDP

Wage rate wise

Sub Prime crisis

Major reasons of Inflation in India

435 commodities are used for the WPI based inflation calculation and base year for the WPI calculation is 1993-94.

WPI is available at the end of every week (generally Saturdays), for a period of one year ended that day

The wholesale price index comprises of the following indices:

◦ Domestic Wholesale Price Index (DWPI)◦ Export Price Index (EPI)◦ Import Price Index (IPI)◦ Overall Wholesale Price Index (OWPI)

Measuring Inflation

Hoarding Increased risk Fixed income recipients Increased consumption ratio Lowers national saving Illusions of making profits Rising prices of imports Causes business cycles to go out of

business

Effects of Inflation

Inflation is calculated using CPI (consumer price index).

Every month the Bureau of Labor Statistics (BLS) surveys thousands of prices all over the country and generates the CPI. 

How to calculate inflation

EXAMPLE:- Assume for the sake of simplicity that

the index consists of one item and that in 2012 that item cost $1.00. The BLS pegged the index in 2008 at 100* (see Footnote). In January of 2013 that same item would probably cost $1.98 and today it would cost even more. But let's calculate the price difference between 2008 and 2013.

Step 1: Calculate- How Much has the Consumer Price Index Increased?]

By looking at the above example, common sense would tell us that the index increased (it went from 100 to 198).  The question is how much has it increased? To calculate the change we would take the second number (198) and subtract the first number (100). The result would be 98.  So we know that from 1984 until 2006 prices increased (Inflated) by 98 points.

So if we want to know how much prices have increased over the last 12 months (the commonly published inflation rate number) we would subtract last year's Consumer Price Index from the current index and divide by last year's number and multiply the result by 100 and add a % sign

. The formula for calculating the Inflation Rate looks like this:

 ((B - A)/A)*100

Calculating the Inflation Rate Over a Specific Time Period

Where "A" is the Starting number and "B" is the ending number.

So if exactly one year ago the Consumer Price Index was 178 and today the CPI is 185, then the calculations would look like this:

 ((185-178)/178)*100 or (7/178)*100 or 0.0393*100 

which equals 3.93% inflation over the sample year. (Not Actual Inflation Rates).

Strengthen local currency e.g. Indian Rupee

The Reserve Bank of India (RBI) hikes the interest rates to control inflation.

Government uses the fiscal policy to check inflation.

Government to choose alternative of direct intervention

Reforming long term labor related policies

Curbing Inflation

In 2009-10, increase in inflation was due to factors like food inflation hike. (Supply shortage of cereals, pulses, wheat, and rice due to drought in country)

In 2010-11, high inflation is attributed to increased prices of fruits and vegetables (due to increase in demand) and increase in commodity prices e.g. crude oil.

Major Highlights

Measures taken by Reserve Bank of India:

Headline inflation in May, 2011 rise to 8.72 %.

Reserve Bank of India hiked key policy

rates (repo rate and reverse repo) by 25 basis points.

Inflation Control in India – 2011

Inflation continues posing a threat Inflation has been caused by rapid growth Fall in oil prices and higher interest rates will lead

to reduction in inflation

Challenges for Indian Economy in 2014 Getting inflation under control Spreading the growth benefits more equitably. Completing investment projects that are

essential for the long term development of economy.

Dealing with global financial uncertainty that will make the capital flows and exports more difficult.

Conclusion

http://www.worldjute.com/inflation.html

http://www.inflation.eu/inflation-rates/india/historic-inflation/cpi-inflation-india-2011.aspx

http://business.rediff.com/report/2010/mar/04/budget-2010-the-shocking-picture-of-inflation-in-india.htm

http://www.indexmundi.com/India/inflation_rate_%28consumer_prices%29.html

References:

CURRENT CONSUMER PRICE INDEX(CPI-U) (238.250).

CURRENT INFLATION RATE -1.99%