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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.

It
It
It

is a continuous process.
refers to a rise in prices in general.
involves a considerable increase in
prices.
It causes a decline in the purchasing
power of money.

1.
2.

Demand Pull Inflation


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 ($)

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)
b)
c)
d)
e)
f)
g)
h)

Increase in cost of raw materials


Shortage of Supplies
Natural calamities
Industrial Disputes
Increase in Exports
Increase in Wages
Increase in Transportation Cost
Huge Expenditure on Advertisement

BENEFITS

DEBTORS
ENTREPRENEURS
INVESTORS
FARMERS
UPPER INCOME
GROUPS

LOSES
CREDITORS
FIXED INCOME
GROUPS
CONSUMERS
MIDDLE AND
LOWER 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
countrys balance of payments.
If Indias 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.

In 2013, the consumer price index replaced the


wholesale price index (WPI) as a main measure of
inflation.
In India, the most important category in the
consumer price index is Food and beverages (45.86
percent of total weight). Housing accounts for 10
percent; Transport and communication for 8.6
percent; Fuel and light for 6.84 percent; Clothing and
footwear for 6.5 percent; Medical care for 5.9
percent and education for 4.5 percent.
Consumer price changes in India can be very volatile
due to dependence on energy imports, the uncertain
impact of monsoon rains on its large farm sector,
difficulties transporting food items to market
because of its poor roads and infrastructure and high
fiscal deficit.

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

To increase money supply


To promote credit creation by the banks
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
1.
2.
3.

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