Introduction

Inflation generally means rise in prices.

Inflation is an increase in the price of a
basket of goods and services that is
representative of the economy as a
whole.
It is a persistence and substantial rise in
general level of prices after full
employment level of output.

Definition

a general and progressive increase in

prices; "in inflation everything gets more
valuable except money
In economics, inflation is a rise in the
general level of prices of goods and
services in an economy over a period of
time....

Inflation
reduces
the
real
amount of savings in the long run.
Common man is adversely affected when
the annual rate of inflation is exceeding
the current rate of interest. Continuous
inflation also discourages the individual
Eg: With Rs. 100 you can buy 5kgs of apple
savings of a common man .
when the inflation is say, zero. Now when the
inflation rate is 5%, then you will need Rs. 105 to
buy the same quantity of apples. This is because
there is more money chasing the same produce.

Types Of Inflation

Types of Inflation

Demand-pull Inflation
Cost Push Inflation
Monetary inflation
Structural inflation
Imported inflation

Terms Relating to Inflation

Deflation
Disinflation
Reflation
Stagflation

How to Calculate
Inflation

Measuring Inflation

Inflation is measured by calculating the

percentage rate of change of a price index,
which is called the inflation rate
Consumer Price Index

Wholesale Price Index

Consumer Price Index

CPI is a measure estimating the average price

of consumer goods and services purchased by
households.
CPI measures a price change for a constant
market basket of goods and services from one
period to the next within the same area (city,
region, or nation).
It is a price index determined by measuring
the price of a standard group of goods meant
to represent the typical market basket of a
typical urban consumer. The percent change
in the CPI is a measure estimating inflation.

Wholesale Price Index

WPI was published in 1902,and was one of the

economic indicators available to policy makers
until it was replaced by most developed
countries by the CPI market. index in the 1970.
WPI is the index that is used to measure the
change in the average price level of goods
traded in wholesale market.
Some countries (like India and The Philippines)
use WPI changes as a central measure of
inflation. However, India and the United States
now report a producer price index instead.

Causes of Inflation

Causes of Inflation

For controlling the rates of commodity, we

must know why these rates are rising i.e.
inflating which means what are the reasons
or causes behind inflation. There are
various factors which causes inflation in the
economy which is as followsMonetary Factors
Non-monetary Factors
Structural Factors.

Monetary Factors

Expansion Of Money Supply

Increase in Disposable Income
Increase in Consumer Spending
Development And Non Development
Expenditure
Indirect Taxes
Demand for Foreign Commodities

Non Monetary Factors

Rising Population
Natural Calamities
Speculation and Black Money
Bottleneck and Shortages

Structural Factors

Capital Shortage
Infrastructural Bottlenecks
Limited Efficient Entrepreneurs
Lack of Foreign Capital

Effects of Inflation

Economic Effects of Inflation

Inflation is a very unpopular happening in an

economy. Inflation is the most important
concern of the people as it badly affects their
standard of living.
The effects/consequences of inflation are as
follows
(a) Effects of inflation on production
(b) Effects of inflation on income
distribution
(c) Effects on consumption and welfare
(d) Effects on foreign trade

Effect on Production or Economic

Activities

Favourable Effect

When price rise profits increases,

investment increases that generates
income and creates employment as a
results output expands.

Unfavorable Effects

Uncontrolled inflation leads to discouragement

in savings due to falling value of money.
Flight of capital is encouraged due to fall in
money the investors prefer to invest abroad.

Effect on Distribution of
Income:

As the value of money falls the burdens of

debt is reduced and debtors gain creditor
suffer because in real sense they receive less
during inflation. (Debtors vs Creditors. )
Investors in shares benefit during inflation
small savers, small investors and class lose
during inflation. (Holders of fixed interest
security vs Shareholders. )
Fixed income groups like salaried class and
pensioners are hit hard during inflation.

Other Effects:

Effects on consumption and welfare

Effects on foreign trade

Social and political effects

Measures to Control
Inflation

Measures to control Inflation

These are the following measures taken to

control inflation
1) Monetary Measures
2) Fiscal Measures
3) Other Non-monetary Measures

Monetary Measures

Raising Bank Rates

Open Market Operations
Variable Reserve Ratio
Fixation of Margin Requirements
Regulation of Consumer Credit
Control through Directives

Fiscal Measures

Taxation
Public Expenditure
Public Borrowing
Inducement to Save

Other Non monetary Measures

Increase in output
Price control & Rationing
Imports
Wage Rates