1. Inflation
Definition, types and causes of
inflation

2. Areas to focus on

3. What Is Inflation?
• Inflation is an increase in the average level of prices, not
a change in any specific price.
• Inflation is a phenomenon whereby general price level
rises persistently.
• According to Prof. Crowther,
• “Inflation is a state in which the value of the money falls
and price level persistently rises.”
• Prof. Ackly, “inflation is a persistent and appreciable rise
in the general value of average prices”.
• Prof. Piguo, “inflation takes place when price level
expands more proportion to output”.

4. Types of inflation on the basis of
inflation rate
• Creeping inflation
• A situation in which the rise in general price level is at
a very slow rate over a period of time. Under creeping
inflation, the price level rises up to a rate of 2 percent
per annum. A mild inflation is generally considered a
necessary condition of economic growth.
• Walking inflation. Walking inflation is a marked
increase in the rate of inflation as compared to creeping
inflation. The price rise is around 5 percent annually.

5. Continued….
• Running inflation. Under running inflation, the
price increase is about 8 to 10 percent per annum.
• Galloping or Hyper Inflation. Galloping
inflation is a full inflation. Keynes calls it as the
final stage of inflation. It is a stage of inflation
which starts after the level of full employment is
reached. Here price level rises very rapidly within
a short period.

6. Social Tensions
• Tensions between labor and management,
between government and the people, and
among consumers may overwhelm a society
and its institutions.

7. Money Illusion
• The use of nominal Rupee rather than real to
gauge changes in one’s income or wealth is
called the money illusion.

8. Macro Consequences
• Inflation can alter the rate and mixes of output
by changing consumption, work, saving,
investment, and trade behavior.

9. Uncertainty
• People tend to shorten their time horizons in
the face of inflation uncertainties.
• Time horizons are shortened as people attempt
to spend money before it loses further value.

10. Speculation
• Few people will engage in production if it is
easy to make speculative profits.
• Such speculation may fuel hyperinflation.
– Hyperinflation is an inflation rate in excess of 200
percent, lasting at least one year.

11. Bracket Creep
• Bracket creep is the movement of taxpayers
into higher tax brackets (rates) as nominal
incomes grow.

12. Deflation Dangers
• Deflation — a falling price level — might not
make people happy either.
• Deflation reverses the redistributions caused
by inflation.
• Lenders win and creditors lose.

13. Measuring Inflation
• Measuring inflation serves two purposes:
– Gauges the average rate of inflation.
– Identifies its principal victims.

14. Causes of Inflation
• The cause of inflation is rooted in supply and
demand.

15. Demand-Pull Inflation
• Demand-pull inflation results from excessive
pressure on the demand side of the economy.
• “Too much money chases too few goods”
enabling producers to raise prices.

16. Cost-Push Inflation
• The pressure on price could also originate on
the supply side.
• Higher production costs put upward pressure
on product prices.