WHAT IS INFLATION Defination: Inflation is defined as the rate at which the general level of prices for goods and

services is rising and subsequently purchasing power is falling Measures of Inflation Inflation is measured by calculating the percentage rate of change of a price index, which is called the inflation rate. Consumer price indices Cost of living indices Producer price indices Commodity price Indices Causes of Inflation in Current Scenario Global imbalance the cause for global liquidity The psychological dimension Higher international farm prices impact Indian farm prices

Growth and forex flows Steps taken to control the current inflation

A well planned, reasonable and balanced intervention by the government people have to understand the facts and logistics of price inflation. The public distribution system has to be geared up

INFLATION IN AIRLINE INDUSTRY

One major issue is cost of Aviation Turbine Fuel Companies prefer to ground flights Prefer paying parking charges of Rs 50,000 per hr rather than keeping a flight in air which costs Rs 3,50,000.00 per hr Job cuts in airline industries on a rise

INFLATION IN BANK

The RBI may go for further monetary tightening in the light of rising inflation Yields are rising, compelling the banks to raise interest rates, which will hamper their business growth

Inflation concerns remain high with finance ministry officials indicating the rate could go up to 13 per cent in the near term

EFFECTS ON INFLATION ON AUTOMOBILE COMPANIES IN INDIA

The automobile sector is also suffering because of soaring raw material prices The automobile sector is also suffering because of soaring raw material prices The automobile sector is also suffering because of soaring raw material prices The two-wheeler sector is especially suffering, as banks are not willing to lend fearing delinquency.

EFFECT ON STEEL AND RUBBER INDUSTRIES

Steel prices have hardened almost 21 in the current calendar year during 2008, aluminium has risen by 16 in the current calendar year. Rubber and plastic prices have also gone up substantially by 17 in the current calendar year and 24 in the current calendar year respectively

INFLATION IN IT COMPANIES

Patni computers has handed the pink slip to over 400 employees for non performance. TCS other companies warns its employees that non performance wont be tolerated. Companies like wipro and sutherland may cut down on incentives and other perks

INFLATION IN CEMENT INDUSTRY

Higher input costs, low market valuations and scaled up capacity amidst reduced demand is likely to take its toll on the cement industry. The growth rate of the industry is projected to drop below 10 % for the current fiscal. High inflation and home loan rates have slowed down the growth trajectory of the real estate sector, which accounts for 60 % of the total cement demand.

Small shops affected

Kirana stores have started feeling the heat . Some small shops have shut and others are considering getting into new businesses Prices of products or rice and pulses have gone up Inflation has hit low income group which has taken its toll on small retail stores and businesses

. EFFECT ON OIL PRICES

India is among the most expensive places for oil Middle class have started using public transportation Rising oil prices is a concern especially with the growth in sales of automobiles More people have started using one mode of transportation example sharing of a car to go to office Demand for petroleum products has increased at 2.4% to 3.3 %

ON Fast moving consumer goods (FMCG)

FMCGs are feeling the heat of inflation as their input costs have gone up while their sales have stagnated, FMCG majors Godrej and Marico registered a decline of 0.88 percent and 8.28 percent in their total income on sequential quarter basis, while Hindustan Unilever and Dabur managed to post a 15.72 percent and 16.47 percent increase respectively.

Slow Moving Consumer Goods SMGC

LG has increased the prices of their products by 3 % Most companies like voltas videocon samsung have cut down on the offers they used to have for their customers. Sales have delined for smgcs over the last 3 months by 23%

Sensex

A huge 6.5 % fall in Reliance Industries & 4.5 % fall in Bharti Airtel was responsible for the benchmark Sensex to close at 14590.16 points, down 498 points. For the first time in 2008, the Sensex dipped from the psychological level of 15,000 points Investors confidence is dented by the rising inflation. 1. INFLATION I n f la ti o n c a n b e de f i ne d a s a r is e i n th e g e ne r a l p r ic e l e ve l a n d t h e r e f o r e a f a l l in th e v a lue o f m o ne y . I n f la ti o n o c c ur s w h e n t h e a m o un t o f b uy i ng p o we r is h ig h e r th a n th e o u tp ut o f g o o ds a n d services. Inflation also occurs when the amount of money exceedsthe amount of goods and services available. As to whether the fallin the value of money will affect the functions of money dependso n t h e de g r e e o f th e f a l l. Ba s ic a l ly , r e f e r s to a n in c r e a s e i n t h e s up p l y o f c ur r e n c y o r c r e d i t r e la ti ve t o th e a va i la b i l i ty o f g o o ds and services, resulting in higher prices.Therefore, inflation can be measured in terms of percentages. The percentage increase in the price index, as a rate per cent per unit of time, which is usually in years. The two basic price indexes areused when measuring inflation, the producer price index (PPI) and the consumer price index (CPI) which is also known as the cost of living index number. 2. HOW INFLATION IS MEASURED? Inflation is normally given as a percentage and generally in yearsor in some instances quarterly and is derived from the Consumer Price Index (CPI).Ho we ve r , th e r e a r e tw o m a in i n di c e s us e d to m e a s ur e inf l a t io n. T h e f i r s t i s t h e Consumer Price Index, or the CPI. The CPI is a m e a s ur e o f th e p r ic e o f a s e t g r o up o f g o o ds a n d s e r vi c e s . Th e " b u n d l e , " a s t h e g r o u p i s k n o w n , c o n t a i n s i t e m s s u c h a s f o o d , clothing, gasoline, and even

computers. The amount of inflation ism e a s ur e d b y th e c h a ng e i n th e c o s t o f th e b un d le : if i t c o s ts 5 % m o r e to p ur c h a s e t h e b u nd le t h a n i t d id o ne y e a r b e f o r e , t h e r e has been a 5% annual rate of inflation over that period based on t h e CPI. You will also often hear about the "Core R a t e " o r t h e "Core CPI." There are certain items in the bundle used to measuret h e C PI th a t a r e e x tr e m e ly vo l a t i le , s uc h a s g a s o l ine p r ic e s . By eliminating the items that can significantly affect the cost of theb u n dle ( in e it h e r d ir e c ti o n) o n a m o n th - t o - m o n th b a s is , t h e C o r e rate is thought to be a better indicator of real inflation, the slow, but steady increase in the price of goods and services

The second measure of inflation is the Producer Price Index, or thePPI. While the CPI indicates the change in the purchasing power of a consumer, the PPI measures the change in the purchasing power o f t h e producers of those goods. The PPI measures how m u c h producers of products are getting on the wholesale level, i.e. the price at which a good is sold to other businesses before the good i s s o l d t o a c o n s u m e r . T h e P P I a c t u a l l y c o m b i n e s a s e r i e s o f smaller indices that cross many industries and measure the pricesf o r t h r e e t y p e s o f g o o d s : c r u d e , i n t e r m e d i a t e a n d f i n i s h e d . Generally, the markets are most conc e r n e d w i t h t h e f i n i s h e d g o o ds b e c a us e th e s e a r e a s tr o ng i n di c a to r o f w h a t w i l l h a p p e n w i t h f u t u r e C P I r e p o r t s . T h e C P I i s a m o r e p o p u l a r m e a s u r e o f inflation than the PPI, but investors watch both closely.TYPES OF INFLATION:Subsequently, when either the prices of goods or services or thesupply of money rises; this is considered as inflation. Dependingo n t h e c h a r a c t e r i s t i c s a n d t h e i n t e n s i t y o f i n f l a t i o n , t h e r e a r e several types, namely. Creeping inflation Trotting inflation

Galloping inflation Hyper inflation

W h e n t h e r e i s a g e ne r a l r is e i n p r i c e s a t ve r y lo w r a te s , w h ic h is us ua l ly b e twe e n 2- 4 p e r c e n t a nn ua l ly , th is i s k n o w n a s c r e e p i ng inflation.Whereas, trotting inflation occurs when the percentage has risenf r o m 5 t o a lm o s t p e r c e n t. At t h is le ve l i t i s a w a r n i n g s ig na l f o r most governments to take measures to avoid exceeding double-digit figures. Another type of inflation is the galloping inflation, where the rateof inflation is increasing at a noticeable speed and at a remarkablerate, usually from 10-20 percent.However, when the inflation rate rises to over 20% it is generally c o n s i d e r e d a s h y p e r i n f l a t i o n a n d a t t h i s s t a g e i t i s a l m o s t u n c o n t r o l la b le b e c a u s e i t in c r e a s e s m o r e r a p id ly i n s uc h a l it t le time frame.

3. CAUSES OF INFLATION I n f la ti o n c o m e s i n d if f e r e n t f o r m s a nd t h o s e a t a r e f a m i l ia r w i th the economic matters would observe that there are trends in thew a y th a t p r ic e s a r e m o vi ng g r a d ua l a n d ir r e g ul a r i n r e la t io n to a g g r e g a t e s e c t i o n s o f t h e e c o n o m y . T h i s suggest that there ism o r e t h a n o n e f a c t o r t h a t c a u s e s i n f l a t i o n a n d a s d i f f e r e n t s e c t io ns o f th e e c o n o m y de ve lo p it g ive s r is e t o di f f e r e n t ty p e s inflationary periods. The main causes of inflation are: Demand-pull Inflation Cost push Inflation Monetary inflation Structural inflation

 Imported inflation DEMAND-PULL INFLATIONDemand-pull inflation occurs when the consumers, businesses or t h e g o v e r n m e n t s d e m a n d f o r g o o d s a n d s e r v i c e s e x c e ed thes u p p l y ; t h e r e f o r e t h e c o s t o f t h e i t e m r i s e s , u nless supply is perfectly elastic. Because we do not l i v e i n a p e r f e c t m a r k e t supply is somewhat inelastic and the supply of goods and servicescan only be increased if the factors of production are increased.The increase in demand is created from in increase in other areas,such as the supply of money, the increase of wages which would then give rise in disposable income, and once the consumers havemore disposal income this would lead to aggregate spending. As aresult of the aggregate spending there would also be an increasein demand for exports and possible hoarding and profiteering from p r o d u c e r s . T h e e x c e s s ive de m a nd, th e p r ic e s o f f i na l g o o ds a nd services would be forced to increase and this increase gives rise to inflation. COST-PUSH INFLATIONCost-push inflation is caused by an increase in production costs. It is generally caused by an increase in wages or an increase in the profit margins of the entrepreneurs.When wages are increased, this causes the business owner to inturn increase the price of final goods and services which would be passed onto the consumers and the same consumers are also theemployees. As a result of the increase in prices for final goods and services the employees realise that their income is insufficient tomeet their standard of living because the basic cost of living hasi n c r e a s e d . T h e t r a d e u n i o n s t h e n a c t a s t h e m e d i ator for thee m p l o y e e s a n d n e g o t i a t e b e t t e r w a g e s a n d c o n d i t i o n s o f employment. If the negotiations are successful and the employeesa r e g i ven th e r e que s te d wa g e i n c r e a s e t h is wo u ld f ur t h e r a f f e c t the prices of goods and services and invariably affected.O n t h e o t h e r h a n d , w h e n f i r m s a t t e m p t t o i n c r e a s e t h e i r p r o f i t margins by making the prices more responsive to supply of a good o r s e r v ic e ins te a d o f th e de m a n d f o r t h a t s a id g o o d o r s e r vi c e . This is usually done regardless to the state of the economy. Thiscan be seen in

monopolistic economies where the firm is the onlys u p p lie r o r b y e n tr e p r e ne ur s th a t a r e s e e k ing a la r g e r p r o f i t f o r their own self interests.MONETARY INFLATIONMo ne ta r y i nf la t io n o c c ur s w h e n t h e r e is a n e x c e s s ive s up p ly o f money. It is understood that the government increases the money supply faster than the quantity of goods increases, which resultsi n i n f l a t i o n . I n t e r e s t i n g l y a s t h e s u p p l y o f g o o d s i n c r e a s e t h e money supply has to increase or else prices actually go down.W h e n a d o l l a r i s w o r t h l e s s b e c a u s e t h e s u p p l y o f d o l l a r s h a s increased, all businesses are forced to raise prices just to get thesame value for their products.STRUCTURAL INFLATIONP l a n n e d i n f l a t i o n t h a t i s c a u s e d b y a g o v e r n m e n t ' s m o n e t a r y p o l ic y is c a l le d s tr uc t ur a l i nf l a t io n. T h is t y p e o f inf l a t io n is no t c a u s e d b y t h e e x c e s s o f d e m a n d o r s u p p l y b u t i s b u i l t i n t o a n economy due to the governments monetary policy.I n d e v e l o p e d c o u n t r i e s t h e y a r e c h a r a c t e r i z e d b y a la c k o f adequate resources like capital, fo r e i g n e x c h a n g e , l a n d a n d i n f r a s tr uc t ur e . F ur t h e r m o r e , o ve r - p o p u la t io n w i th th e m a jo r it y depending on agriculture for their livelihood means that there is af r a g m e n ta ti o n o f t h e l a nd h o l d ing s . T h e r e a r e o t h e r i ns t it u ti o na l factors like landownership, technological backwardness and lowrate of investment in agriculture. These features are typical of thedeveloping economies. For example, in developing country w heret h e m a jo r i ty o f t h e p o p ul a ti o n l ive i n t h e r ur a l a r e a s a nd dep e n d o n a g r i c u l t ur e a n d t h e g o ve r nm e n t i m p le m e n ts a ne w i n dus tr y , some people get employment outside the agricultural sector and s e t t le d o w n i n ur b a n a r e a s . Be c a us e th e r e m ig h t b e an u ne qu a l d i s t r i b u t i o n o f l a n d o w n e r s h i p a n d t e n a n cy, technologicalbackwardness and low rates of i n v e s t m e n t s i n a g r i c u l t u r e inclusive of inadequate growth of the domestic supply of food w h i c h c o r r e s p o n d s w i t h a n i n c r e a s e i n d e m a n d a r i s i n g f r o m increasin

g urbanization and population prices increase.F o o d b e ing th e k e y w a g e - g o o d, a n in c r e a s e i n i ts p r ic e te n ds to r a is e o th e r p r i c e s a s we l l. T h e r e f o r e , s o m e e c o n o m is ts c o ns i de r f o o d p r i c e s to b e t h e m a j o r f a c t o r , wh i c h le a ds t o i nf la t io n i n t h e developing economies.IMPORTED INFLATION A n o t h e r ty p e o f i nf la t io n i s i m p o r te d i nf la t io n. T h is o c c ur s w h e n the inflation of goods and services from foreign countries that areexperiencing inflation are imported and the increase in prices for that imported good or service will directly affect the cost of living. A n o t h e r w a y i m p o r t e d i n f l a t i o n c a n a d d t o o u r i n f l a t i o n r a t e i s when overseas firms increase their prices and we pay more for our goods increasing our own inflation. 4. EFFECT OF INFLATION Inflation can have positiveand negative effects on an economy .Negative effects of inflation include loss in stability in the realvalue of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, and high inflation may lead to shortages of goodsif consumers beginhoardingout of concern that prices will increase in the future.Positive effects include a mitigation of economicrecessions, and debt relief by reducing the real level of debt.Most effects of inflation are negative, and can hurt individuals and companies alike, below are a list of negative and positive effectsof inflation.

NEGATIVE EFFECTS ARE: Hoarding (people will try to get rid of cash before it isdevalued, by hoarding food and other commodities creatingshortages of the hoarded objects). Distortion of relative prices (usually the prices of goods gohigher, especially the prices of commodities). Increased risk - Higher uncertainties (uncertainties inbusiness always exist, but with inflation risks are very high,because of the instability of prices). Income diffusion effect (which is basically an operation of income redistribution).

Existing creditors will be hurt (because the value of themoney they will receive from their borrowers later will belower than the money they gave before). Fixed income recipients will be hurt (because while inflationincreases, their income doesnt increase, and therefore their income will have less value over time). Increased consumption ratio at the early stages of inflation(people will be consuming more because money is moreabundant and its value is not lowered yet). Lowers national saving (when there is a high inflation, savingmoney would mean watching your cash decrease in valueday after day, so people tend to spend the cash onsomething else). Illusions of making profits (companies will think they weremaking profits while in reality theyre losing money if theydont take into consideration the inflation rate whencalculating profits). Causes an increase in tax bracket (people will be taxed ahigher percentage if their income increases following aninflation increase). Causes mal-investment (in inflation times, the data givenabout an investment is often deceptive and unreliable,therefore causing losses in investments). Causes business cycles (many companies will have to go out of business because of the losses they incurred from inflationand its effects). Currency debasement (which lowers the value of a currency,and sometimes cause a new currency to be born) Rising prices of imports (if the currency is debased, then its purchasing power in the international market is lower)."POSITIVE" EFFECTS OF INFLATION ARE: It can benefit the inflators (those responsible for the inflation)

It be benefit early and first recipients of the inflated money (because the negative effects of inflation are not there yet). It can benefit the cartels (it benefits big cartels, destroyssmall sellers, and can cause price control set by the cartelsfor their own benefits) ---It might relatively benefit borrowers who will have to pay thesame amount of money they borrowed (+ fixed interests),but the inflation could be higher than the interests, thereforethey will be paying less money back. (example, you borrowed $1000 in 2005 with a 5% fixed interest rate and you paid it back in full in 2007, lets suppose the inflation rate for 2005,2006 and 2007 has been 15%, you were charged %5 of interests, but in reality, you were earning %10 of interests,because 15% (inflation rate) 5% (interests) = %10 profit,which means you have paid only 70% of the real value in the3 years.Note: Banks are aware of this problem, and when inflationrises, their interest rates might rise as well. So don't take out loans based on this information. Many economists favor a low steady rate of inflation, low (asopposed to zero or negative) inflation may reduce theseverity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reducing the risk that a liquidity trap prevents monetary policy from stabilizingthe economy. The task of keeping the rate of inflation lowand stable is usually given to monetary authorities.Generally, these monetary authorities are the central banksthat control the size of the money supply through the settingof interest rates, through open market operations, and through the setting of banking reserve requirements.

5. METHODS TO CONTROL

A high inflation rate is undesirable because it has n e g a t i v e consequences. However, the remedy for such inflation depends ont h e c a u s e . T h e r e f o r e , g o v e r n m e n t m u s t d i a g n o s e i

t s c a u s e s before implementing policies.MONETARY POLICY I n f l a ti o n i s p r im a r ily a m o ne ta r y p h e no m e no n. He nc e , th e m o s t l o g i c a l s o lu t io n to c h e c k inf l a t i o n i s to c h e c k th e f lo w o f m o ne y s u p p l y b y d e v i s i n g a p p r o p r i a t e m o n e t a r y p o l i c y a n d c a r e f u l l y implementing such measures. To control inflation, it is necessary t o c o n t r o l t o t a l e x p e n d i t u r e s b e c a u s e u n d e r c o n d i t i o n s o f f u l l employment, increase in total expenditures will be reflected in ageneral rise in prices, that is, inflation. Monetary policy is used toc o n t r o l i n f l a t i o n a n d i s b a s e d o n t h e assumption that a rise in p r i c e s i s d u e t o e x c e s s o f m o n e t a r y d e m a n d f o r g o o d s a n d services by the consumers/households e because easy bank credit i s a v a il a b le t o th e m . M o ne ta r y p o li c y , t h us , p e r ta i ns to b a nk ing a nd c r e d i t a va i la b i l i ty o f lo a ns t o f ir m s a nd h o us e h o lds , i n te r e s t r a t e s , p u b l i c d e b t a n d i t s m a n a g e m e n t , a n d t h e m o n e t a r y standard. Monetary management is a i m e d a t t h e c o m m e r c i a l banking systems, and through this action, its effects are primarily felt in the economy as a whole. By directly affecting the volume of cash reserves of the banks, can regulate the supply of money and c r e d i t i n t h e e c o n o m y , t h e r e b y i n f l u e n c i n g t h e s t r u c t u r e o f i n t e r e s t r a te s a n d t h e a va i la b i li ty o f c r e d i t. Bo t h th e s e , f a c to r s a f f e c t t h e c o m p o n e n t s o f a g g r e g a t e d e m a n d a n d t h e f l o w o f expenditure in the economy.The central banks monetary management methods, the devicesf o r de c r e a s ing o r i n c r e a s ing t h e s u p p ly o f m o ne y a nd c r e d i t for m o n e t a r y s t a b i l i t y i s c a l l e d m o n e t a r y p o l i c y . C e n t r a l b a n k s generally use the three quantitative measur e s t o c o n t r o l t h e volume of credit in an economy, namely:1. R a i s ing b a nk r a te s 2. O p e n m a r k e t o p e r a t io n s a nd 3 . V a r ia b l e r e s e r ve r a t io However, there are various limitations on the effective working of the quantitative measures of credit control adapted by the centralbanks and, to that extent, monetary measures to control inflationare weakened. In fact, in controlling inflation moderate monetary measures, by themselves, are relatively ineffective. On the other hand, drastic monetary measures are not

good for the economicsystem because they may easily send the economy into a decline.I n a de ve lo p ing e c o no m y th e r e i s a lw a y s a n i n c r e a s ing ne e d f o r c r e di t. G r o w t h r e q u ir e s c r e d i t e x p a ns i o n b u t to c h e c k i nf l a t io n, t h e r e i s ne e d to c o n tr a c t c r e d i t. I n s uc h a n e nc o u nt e r , t h e b e s t c o u r s e i s t o r e s o r t t o c r e di t c o n tr o l, r e s tr i c ti ng t h e f lo w o f c r e d i t in t o th e u np r o d uc t ive , i n f l a ti o n - in f e c te d s e c t o r s a n d s p e c u la t ive a c t i v i t i e s , a n d d i v e r s i f y i n g t h e f l o w o f c r e d i t t o w a r d s t h e m o s t desirable needs of productive and growth-inducing sectorI t s h o ul d be no te d th a t th e i m p r e s s i o n th a t t h e r a te o f s p e n d ing can be controlled rigorously by the contraction of credit or money s up p ly i s w r o ng i n th e c o n te x t o f m o de r n e c o n o m ic s o c ie t ie s . I nm o de r n c o m m un i ty , t a ng ib le , we a l t h i s ty p ic a l ly r e p r e s e n te d b y c l a i m s i n th e f o r m o f s e c ur it ie s , b o n ds , e tc . , o r ne a r m o ne y s , a s th e y a r e c a l le d. S uc h ne a r m o ne y s a r e h ig h ly li q u id a s s e ts , a nd th e y a r e ve r y c l o s e to b e i ng m o ne y . T h e y i nc r e a s e th e g e ne r a l l i q u i d i t y o f t h e e c o n o m y . I n t h e s e c i r c u m s t a n c e s , i t i s n o t s o s i m p le to c o n tr o l th e r a te o f s p e nd i ng o r t o ta l o u tl a y s m er e ly b y c o n tr o l ling th e qua n ti ty o f m o ne y . T h us , th e r e i s n o im m e d i a te and direct relationship between money supply and the price level,as is normally conceived by the traditional quantity theories.When there is inflation in an economy, monetary restraints can, inconjunction with other measures, play a useful role in controllinginflation. FISCAL MEASURESF i s c a l p o l i c y i s a n o t h e r t y p e o f b u d g e t a r y p o l i c y i n r e l a t i o n t o taxation, public borrowing, and public expenditure. To curve thee f f e c t s o f i n f l a t i o n a n d c h a n g e s i n t h e t o t a l e x p e n d i t ure, fiscalm e a s u r e s w o u l d h a v e t o b e i m p l e m e n t e d w h i c h i n v o l v e s a n increase in taxation and decrease in government spending. Duringinflationary periods the government is supposed to counteract anincrease in private spending. It can be cleared noted that during a period of full employment inflation, the aggregate de m a n d i n relation to the limited supply of goods and services is reduced tothe extent that government expenditures are shortened. Along with public expenditure, governments must

simultaneously increase taxes that would effectively reduce private expenditure,i n a n e f f e c t t o m i n im is e i nf la t io n a r y p r e s s u r e s . I t i s k no wn t h a t when more taxes are imposed, the size of the disposable incomediminishes, also the magnitude of the inflationary gap in regardsto the availability of the supply of goods and services.I n s o m e i n s t a n c e s , t a x p o l i c y h a s b e e n d i r e c t e d t o w a r d s restricting demand without restric t i n g l e v e l o f p r o d u c t i o n . F o r example, excise duties or sales tax on various commodities may t a k e a w a y t h e b u y i n g p o w e r from the consumer goods market without discouraging the level of production. H o w e v e r , s o m e ec o n o m is ts p o i nt o ut th a t th is i s n o t a c o r r e c t w a y o f c o m b a t ing i n f l a t i o n b e c a u s e i t m a y l e a d t o a r e g r e s s i v e s t a t u s w i t h i n t h e economy. As a result, this may lead to a further rise in prices of goods and services, and inflation can spread from one sector of the economy to another and from one type of goods and services to another.T h e r e f o r e , a r e du c ti o n i n p ub l ic e x p e nd i tu r e , a nd a n i nc r e a s e int a x e s p r o d uc e s a c a s h s u r p lus i n th e b udg e t. Ke y ne s , h o we ve r , suggested a programme of compulsory savings, such as deferred pay as an anti-inflationary measure. Additionally, private savings have a strong disinflationary effect onthe economy and an increase in these is an important measure for controlling inflation. Government policy should therefore, includedevices for increasing savings. A strong savings drive reduces thespendable income of the consumers, without any harmful effectsof any kind that are associated with higher taxation.Furthermore, the effects of a large deficit budget, which is mainly r e s p o ns ib le f o r i nf l a t io n, c a n b e p a r ti a l ly o f f s e t b y c o ve r ing t h e deficit through public borrowings. It should be noted that it is only g o v e r n m e n t b o r r o w i n g f r o m n o n b a n k l e n d e r s t h a t h a s a disinflationary effect. In addition, public debt may be managed ins u c h a w a y t h a t the supply of money in the country may b e c o nt r o l le d. Th e g o ve r n m e n t s h o u l d a vo i d p a y ing b a c k a ny of i ts p a s t l o a n s d u r i n g i n f l a t i o n a r y p e r i o d s , i n o r d e r t o p revent ani n c r e a s e i n t h e c i r c u l a t i o n o f m o n e y . A n t i i n f l a t i o n a r y d e b t management also includes cancellation of

public debt held by thecentral bank out of a budgetary surplus.F i s c a l p o l i c y b y i t s e l f m a y n o t b e v e r y e f f e c t i v e i n c o m b a t i n g inflation; therefore a combination of fiscal and monetary tools canwork together in achieving the desired outcome. DIRECT MEASURES OF CONTROL D ir e c t c o n tr o l s r e f e r t o th e r e g u l a to r y m e a s ur e s u nde r ta k e n t o convert an open inflation into a repressed one.S u c h r e g u l a t o r y m e a s u r e s i n v o l v e t h e u s e o f d i r e c t c o n t r o l o n prices and rationing of scarce goods. The function of price controli s a f i x a le g a l c e i li ng , b e y o n d wh ic h p r ic e s o f p a r ti c u la r g o o ds m a y n o t in c r e a s e . Wh e n c e i l ing p r ic e s a r e f i x e d a n d e nf o r c e d, i t m e a ns p r i c e s a r e n o t a l lo we d t o r is e f ur t h e r a n d s o , i n f l a ti o n i s suppressed.Un de r p r ic e c o n tr o l, p r o d uc e r s c a n no t r a is e t h e p r i c e b e y o n d a specified level, even though there may be a pressure of excessivedemand forcing it up. For example, during wartimes, price controlwas used to suppress inflation.In times of the severe scarcity of certain goods, particularly, food g r a i n s , g o v e r n m e n t m a y h a v e t o e n f o r c e r a t i o n i n g , along with p r i c e c o n t r o l . T h e m a i n f u n c t i o n o f r a t i o n i n g i s t o d i v e r t consumption from those commodities whose supply needs to ber e s t r i c t e d f o r s o m e s p e c i a l r e a s o n s ; s u c h a s , t o m a k e t h e commodity more available to a larger num b e r o f h o u s e h o l d s . Therefore, rationing becomes essential when necessities, such asf o o d g r a i n s , a r e r e l a t i v e l y s c a r c e . R a t i o n i n g h a s t h e e ffect of limiting the variety of quantity of goods available for the good cause of price stability and distributive impartiali t y . H o w e v e r , a c c o r di ng t o Ke y ne s , r a t io ni ng in vo l ve s a g r e a t de a l o f wa s te , both of resources and of employment. Another control measure that was suggested is the cont r o l o f wages as it often becomes necessary in order to stop a wageprices p ir a l. D u r ing g a l lo p i ng in f l a t io n, i t m a y b e ne c e s s a r y to a p p ly a w a g e profit freeze. Ceilings on wages and profits keep d o w n d is p o s a b le i n c o m e a nd, t h e r e f o r e th e t o ta l e f f e c t ive

de m a n d f o r goods and services.O n t h e o t h e r h a n d , r e s t r i c t i o n s o n i m p o r t s m ay also help toi n c r e a s e s u p p l i e s o f e s s e n t i a l c o m m o d i t i e s a n d e a s e t h e in f la t io n a r y p r e s s ur e . H o we ve r , t h is i s p o s s ib le o n ly t o a l i m ite d e x t e n t , d e p e n d i n g u p o n t h e b a l a n c e o f p a y m e n t s s i t u a t i o n . Similarly, exports may also be reduced in an effort to increase thea v a i la b i l ity o f th e d o m e s ti c s u p p ly o f e s s e n ti a l c o m m o d i ti es sot h a t i n f l a t i o n i s e a s e d . B u t a c o u n t r y w i t h a d e f i c i t balance of p ay me n t s c a n n o t d a r e to c ut e x p o r ts a n d in c r e a s e i m p o r t s , because the remedy will be worse than the disease itself.In overpopulated countries like India, it is also essential to check the growth of the population through an effective family planning p r o g r a m m e , b e c a u s e t h i s w i l l h e l p i n r e d u c i n g t h e i n c r e a s i n g p r e s s ur e o n th e g e ne r a l de m a nd f o r g o o ds a nd s e r v i c e s . Ag a in, the supply of real goods should be increased by producing more.Without increasing production, inflation just cannot be controlled. Some economists have even suggested indexing in o r d e r t o minimise certain ill-effects of inflation. Indexing refers to monetary corrections through periodic adjustments in money incomes of the p e o p l e a n d i n t h e v a l u e s o f f i n a n c i a l a s s e t s s u c h a s s a v i n g s deposits, which are held by them in relation t o t h e d e g r e e s o f p r ic e r is e . B a s ic a l ly , i f t h e a n nu a l p r i c e we r e to r is e t o 2 0 % , th e m o ne y i n c o m e s a n d va lu e s o f f i na n c i a l a s s e ts a r e e n h a n c e d b y 20%, under the system of indexing.I n d e x i n g a l s o s a v e s t h e g o v e r n m e n t f r o m p u b l i c w r a t h d u e t o severe inflation persisting over a long period. Critics, however, don o t f a v o u r i n d e x i n g , a s i t d o e s n o t c u r e inflation but rather it e n c o u r a g e s l i v i n g w i t h i n f l a t i o n . T h e r e f o r e , i t i s a h i g h l y discretionary method.I n g e ne r a l, m o ne ta r y a nd f is c a l c o nt r o ls m a y b e us e d to r e p r e s s excess demand but direct controls can be more useful when they are applied to specific scarcity areas. As a result, anti -

inflationary policies should involve varied programmes and cannot exclusively depend on a particular type of measure only. 6. OTHER MONETARY PHENOMENA In Keynes view, rising prices in all situations cannot be termed asinflation. In a condition of under-employment, when an increase inmoney supply and rising prices are accompanied by the expansionof output and employment, but when1here are bottlenecks in theeconomy, an increase in money supply may cause cost and pricesto rise more than the expansion of output and employment. Thismay be termed as semi-inflation or reflation till the ceiling of f u l l e m p l o y m e n t i s r e a c h e d . O n c e f u l l e m p l o y m e n t l e v e l i s r e a c h e d, th e e n t ir e i nc r e a s e in m o ne y s up p ly i s r e f le c te d s im p ly by the rising prices - the real inflation.I n c ide n ta l ly , Ke y ne s m e n t io ns th e f o l lo w i ng f o ur r e la t e d te r m s while discussing the concept of inflation: Deflation Disinflation Reflation StagflationDEFLATIONI t i s a c o n d i t i o n o f f a l l i n g p r i c e s accompanied by a decreasinglevel of employment, output and income. Def l a t i o n i s j u s t t h e opposite of inflation. Deflation occurs when the total expenditure o f t h e c o m m u n i t y i s n o t e q u a l t o t h e e x i s t i n g p r i c e s . Consequently, the supply of m oney decreases and as a result p r i c e s f a l l . D e f l a t i o n c a n a l s o b e b r o u g h t a b o u t b y d i r e c t contr actions in spending, either in the form of a reducti o n i n government spending, personal spending or investment spending.D e f l a t i o n h a s o f t e n h a d t h e s i d e e f f e c t o f i n c r e a s i n g unemployment in an economy, since the process often leads to alower level of demand in the economy. However, each and every f a ll i n p r i c e c a nn o t b e c a l le d de f l a t io n. T h e p r o c e s s o f r e ve r s i ng inflation without either

creating unemployment or reducing output is called disinflation and not deflation. Therefore, some perceivedeflation as an underemployment phenomenon.DISINFLATIONWhen prices are falling due to antiinflationary measures adopted b y th e a u th o r i t ie s , w i th n o c o r r e s p o n di ng de c li ne i n th e e x is ti ng l e v e l o f e m p l o y m e n t , o u t p u t a n d i n c o m e , t h e r e s u l t o f t h i s i s disinflation. When acute inflation burdens an economy, disinflationis implemented as a cure. Disinflation is said to take place whendeliberate attempts are made to curtail expenditure of all sorts tolower prices and money incomes for the benefit of the community.REFLATIONR e f l a t i o n i s a s i t u a t i o n o f r i s i n g p rices, which is deliberately undertaken to relieve a depression. Reflation is a means of m o t i v a t i n g t he economy to produce. This is achieved by increasing the supply of money or in some instances r e d u c i n g taxes, which is the opposite of disinflation. Governments can useeconomic policies such as reducing taxes, changing the supply of money or adjusting the interest rates; which in turn motivates thec o u n t r y t o i n c r e a s e t h e i r o u t p u t . T h e s i t u a t i o n i s d e s c r i b e d a s semi-inflation or reflation.STAGFLATIONStagflation is a stagnant economy that is combined with inflation.Basically, when prices are increasing the economy is deceasing.S o m e e c o n o m i s t s b e l i e v e t h a t t h e r e a r e t w o m a in reasons for stagflation. Firstly, stagflation can occur when an economy isslowed by an unfavourable supply, s u c h a s a n i n c r e a s e i n t h e price of oil in an oil importing country, which tends to raise pricesat the same time that it slows the economy by making productionl e s s p r o f i t a b le . I n t h e 1 97 0 's i n f l a ti o n a n d r e c e s s io n o c c u r r e d in different economies at the same time. Basically, what happened w a s t h a t t h e r e wa s p le n ty o f l i qu i di ty i n th e s y s te m a n d p e o p le w e r e s p e n d i n g m o n e y as quickly as they got it because priceswere going up quickly. This gave rise to the second reason f o r stagflation.

Inflation is a state in the economy of a country, when there is a price rise of goods as well as services. To meet the required price rise, individuals have to shell out more than is presumed. With increase in inflation, every sector of the economy is affected. Ranging from unemployment, interest rates, exchange rates, investment, stock markets, there is an aftermath of inflation in every sector. Inflation is bound to impact all sectors, either directly or indirectly. Inflation and stock market have a very close association. If there is inflation, stock markets are the worst affected.

Inflation and stock market- the logistics:

Prices of stocks are determined by the net earnings of a company. It depends on how much profit, the company is likely to make in the long run or the near future. If it is reckoned that a company is likely to do well in the years to come, the stock prices of the company will escalate. On the other hand, if it is observed from trends that the company may not do well in the long run, the stock prices will not be high. In other words, the price of stocks are directly proportional to the performance of the company.In the event when inflation increases, the company earnings (worth) will also subside. This will adversely affect the stock prices and eventually the returns. Effect of inflation on stock market is also evident from the fact that it increases the rates if interest. If the inflation rate is high, the interest rate is also high. In the wake of both (inflation and interest rates) being high, the creditor will have a tendency to compensate for the rise in interest rates. Therefore, the debtor has to avail of a loan at a higher rate. This plays a significant role in prohibiting funds from being invested in stock markets. When the government has enough fund to circulate in the market, the cost of goods, services usually go up. This leads to the decrease in the purchasing power of individuals. The value of money also decreases. In a nut shell, for the economy to flourish, inflation and stock market ought to be more conforming and predictable