Inflation

Introduction
• Definitions
• Causes of inflation
• Effects of inflation
• Types of inflation
• Inflation rate
• Controlling inflation
• Conclusion

Meaning of inflation
In economics, inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. When the general price level rises, each unit of currency buys
fewer goods and services
• Inflation is an increase in the overall level of prices.
• Inflation is not an increase in the price of a specific good or service relative to the prices
of other goods and services.

Definitions of inflation.

According to Prof. Samuelson “inflation occurs when general level of prices & cost are rising”.
“Inflation is an increase in the quantity of purchasing power.”–Gregory
Inflation is the stage of too much money chasing too few goods.”-- Coulbourn

Inflation affects economies in various positive and negative ways.

*The negative effects of inflation include an increase in the opportunity cost of holding
money, uncertainty over future inflation which may discourage investment and savings,
and if inflation were rapid enough, shortages of goods as consumers begin hoarding out
of concern that prices will increase in the future
* Positive effects include reducing the real burden of public and private debt, keeping
nominal interest rates above zero so that central banks can adjust interest rates to
stabilize the economy, and reducing unemployment due to nominal wage rigidity.

Causes of Inflation
There is no single theory for the cause of inflation that is universally agreed upon by
economists and academics, but there are a few hypotheses that are commonly held.

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 ■ The main cause of inflation is the increase in the demand of goods and services
and at the same time decrease in the supply of goods and services
■ There are two theories related to the causes of inflation:

 Demand-pull (when there is excess demand), This occurs when there is

excess aggregate demand in the economy (overall) or in a specific market or
industry. Businesses respond to high demand by raising prices to increase their
profit margin.

Cost-push (when costs rise) This occurs when costs of production or operation
are increasing.

Cost Push inflation is mainly caused due to the following factors:

· increase in wages.

· increase in cost of raw materials

· increased cost of imported components(import-push inflation)

Demand-Pull Inflation – Inflation is caused by the overall increase in demand for goods
and services, which bids up their prices. This theory can be summarized as "too much
money chasing too few goods". In other words, if demand is growing faster than supply,
prices will increase. This usually occurs in rapidly growing economies. This theory is
often promoted by the Keynesian school of economics.

Cost-Push Inflation – Inflation is caused when companies' costs of production go up.

When this happens, they need to increase prices to maintain their profit margins.
Increased costs can include things such as wages, taxes, or increased costs of natural
resources or imports.

Monetary Inflation – Inflation is caused by an oversupply of money in the economy. Just

like any other commodity, the prices of things are determined by their supply and
demand. If there is too much supply, the price of that thing goes down. If that thing is
money, and too much supply of money makes its value go down, the result is that the
prices of everything else priced in dollars must go up! This theory is often promoted by
the “Monetarist” school of economics.

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TYPES OF INFLATION
Creeping Inflation
-Walking or trotting Inflation
-Running Inflation
-Galloping Inflation
-Hyper Inflation

1. Creeping Inflation
“When the rise in prices is very low like that of a snail or creeper, is called Creeping Inflation”
Here the inflation rate is upto 5%
The general level of prices rise at a moderate rate over a long period of time

Walking inflation
This type of strong, or pernicious, inflation is between 3-10 percent a year. It is harmful
to the economy because it heats up economic growth too fast. People start to buy more
than they need, just to avoid tomorrow's much higher prices. This drives demand even
further, so that suppliers can't keep up. More important, neither can wages. As a result,
common goods and services are priced out of the reach of most people

22.Running Inflation ning inflation has inflation

Running inflation has an inflation between 8-10 %. A sense of urgency needs to be shown in
controlling the running inflation.
Persistent running inflation reduces the savings in the economy and results in slowdown in
economic growth

Galloping inflation
When inflation rises to 10 percent or more, it wreaks absolute havoc on the economy.
Money loses value so fast that business and employee income can't keep up with costs
and prices. Foreign investors avoid the country, depriving it of needed capital. The
economy becomes unstable, and government leaders lose credibility. Galloping inflation
must be prevented at all costs.

3.Hyper Inflation
Prices rise very fast at double or triple digit rate. Also called Runway or Galloping Inflations
This type of inflation is witnessed in the past in many countries.
Many Latin American countries like Argentina and Brazil had inflation rates of 50 to 700
percent per year in the 1970s and 1980s.
Many developed and industrialized countries like Italy and Japan also witnessed the hyper
inflation in the past.

Measuring Inflation

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 Inflation is often measured either in terms of Wholesale Price Index or in terms of Consumer
Price Index.

1 Wholesale Price Index(WPI) :

The Wholesale Price Index is an indicator designed to measure the changes in the price
levels of commodities that flow into the wholesale trade intermediaries.
The index is a vital guide in economic analysis and policy formulation, 
It is a basis for price adjustments in business contracts and projects. It is also intended to serve
as an additional source of information for comparisons on the international front

2 Consumer Price Index (CPI)

Consumer price index is specific to particular group in the population. It shows the cost of living
of the group.
• It is based on the changes in the retail prices of goods or services. Based on their incomes,
onsumer spends money on these particular set of goods and services.
• There are different consumer price indices. Each index tracks the changes in the retail prices
for different set of consumers. The reason for the different indices is the differing pattern of
consumers.

grafic

 Inflation was close to the governments target of 2% between 2000-2007

 In 2008, inflation peaked at 5%, primarily because of a surge in the price of oil.
 Inflation fell in 2009, because of the recession and fall in demand.
 In mid-2015, there was a short period of deflation (negative inflation rate – falling prices)

UK inflation in the post-war period.

 In 1974, the inflation rate peaked at 25%. This was due to rising oil prices and rising
wages.
 In the late 1990s and early 2000s, the inflation rate fell to less than 2% in 2004.
 This fall in the inflation rate means prices were increasing at a slower rate.