Dr.A.K.

Panigrahi
 In a broad sense, inflation is that state in which the
prices of goods and services rise on the one hand
and value of money falls on the other
 When money circulation exceeds the production of
goods and services, then inflation takes place in the
economy
 Inflation- The rise in the general level of prices
 In the long term, inflation erodes consumer purchasing
power.
 That means accumulated wealth buys less and less, with
the passage of time.
 Where there is high inflation it is difficult for businesses to
plan for the future as there is uncertainty regarding the cost
of raw materials
 Deflation occurs when the general level of
prices is falling. Deflation have been rare in
the late twentieth century.

 Disinflation denotes a decline in the rate of

inflation.

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 It is a continuous process.
 It refers to a rise in prices in general.
 It involves a considerable increase in prices.
 It causes a decline in the purchasing power of
money.
1. Demand Pull Inflation
2. Cost Push Inflation
 Inflation results when the macro economy has too much
demand for available production. These alternatives fall
under two general categories:
 Demand-Pull Inflation: This inflation occurs when
household, business, government, and foreign industries
collectively try to purchase more output than the economy
is capable of producing. In effect, the demand side of the
aggregate market is "pulling" the price level higher.
 Cost-Push Inflation: Cost-push inflation is inflation
attributable to decreases in supply, primarily due to
increases in production cost
 The demand for goods and services increases and production
remains the same or does not increase as fast. The excess
demand results in prices being “pulled up”.
 Affected by:
I. Greater spending by households(C) (Also because credit has
become more readily available).
II. Investment spending by firms increases as a result of a drop in
interest rates and/or a positive business climate (I).
III. Increased government spending (G).
IV.Higher earnings from exports (X).
 Demand Pull Inflation
Price $

Aggregate Supply

P2
Aggregate Demand 2

P1

Aggregate Demand 1

Q1 Q2 Real GDP ($) 9

Causes for Increase in Demand :-
 Increase in Money Supply
 Increase in Black Marketing
 Increase in Hoarding
 Repayment of Past Internal Debt
 Increase in Exports
 Deficit Financing
 Increase in Income
 Demonstration Effect
 Increase in Black money
 Increase in Credit facilities
 Caused by an increase in the cost of production.
Increased costs “push up” the price level.
 Affected by:
I. Wages (increases in wages and salaries).
II. Increase in price of key imported inputs.
III.Exchange rate depreciation.
IV.Increase in profit margins.
V.Decrease in productivity for the same
remuneration.
VI.Natural disasters.
 Cost Push Inflation
Price $
Aggregate Supply 2

Aggregate Supply 1

P2

P1 Aggregate Demand

Q2 Q1 Real GDP ($) 12

a) Increase in cost of raw materials
b) Shortage of Supplies
c) Natural calamities
d) Industrial Disputes
e) Increase in Exports
f) Increase in Wages
g) Increase in Transportation Cost
h) Huge Expenditure on Advertisement
 BENEFITS LOSES

 DEBTORS  CREDITORS
 ENTREPRENEURS  FIXED INCOME
 INVESTORS GROUPS
 FARMERS  CONSUMERS
 UPPER INCOME  MIDDLE AND LOWER
GROUPS INCOME GROUPS
 Inflation impacts negatively on economic growth.
 Inflation brings about uncertainty in the economy.
 Savings and investment are discouraged.
 Inflation affects the distribution of income.
 Redistributes income from people with fixed incomes to
those with flexible incomes.
 Redistributes income from private individuals to the
government.
 Causes fiscal drag and bracket creep: salary
increases move people into higher tax brackets and
they could be effectively worse off.
 Inflation has an adverse effect on a country’s balance
of payments.
 If India’s rate of inflation is higher than that of our
trading partners the result is a loss of international
competitiveness.
 Inflation can cause a decrease in the real money
value of savings.
 Fiscal Measures
 Monetary Measures
 General Measures
 Increase direct taxes.
 Increase indirect taxes.
 Reduce government spending.
 Introduce measures to increase productivity,
e.g. tax rebates
 Increase interest rates of banks.
 Decrease money supply.
 Decrease availability of credit from banks.
 Decrease currency control.
 Increase productivity.
 Freeze prices and wages.
 Implement a wage restraint policy.
 Encourage personal savings.
 Implement control measures for consumer
credit.
 Import control: make competing imported goods
cheaper.
 Introduce price indexation: linking all prices to a
particular index, e.g. CPI.
 Inflation targeting.
 The inflation rate in India was recorded at 5.96
percent in March of 2013,which is reported by
the Ministry of Commerce and Industry
 In India, the wholesale price index (WPI) is the
main measure of inflation.
 The WPI measures the price of a representative
basket of wholesale goods.
 In India, wholesale price index is divided into
three groups: Primary Articles (20.1 percent of
total weight), Fuel and Power (14.9 percent)
and Manufactured Products (65 percent).
 Deflation is that state in which the value of
goods and services falls
 A sustained decrease in average price level is
called deflation
 Prices fall
 opposite of inflation
 Not the same as disinflation, which is a
reduction in the rate of inflation
 The inflation rate measures the trend in the
average price level
 Govt. withdraws money from circulation
 Govt. imposes heavy direct taxes or takes heavy loans
from the public
 Central bank sells the securities in open market
 Central bank controls the credit money and adopts
various measures such as increase in CRR, credit rationing
and direct action
 The central bank increases the bank rate
 State of over-production takes place in the economy
1. To increase money supply
2. To promote credit creation by the banks
3. Curtailment in taxes so as to increase the
purchasing power of the people
4. To increase the public expenditure and to
increase the employment opportunities in the
economy
5. To increase the money supply in circulation by
repayment of old public debts
6. To provide economic subsidy by the govt. to the
industrial sector of the economy