Inflation, Everyone’s illusion of money.Topic :
Team : Abhinav Duggal & Vikesh Khanna
B.Tech. Computer Science, II Year.Batch :
“Some things you
should know ”
“Inflation is when you pay fifteen dollars for the
ten-dollar haircut you used to get for five dollars when you had hair”
Origin & Definitions
Measures and Indices
Effects on Global Economy
A glimpse of what is
Rise in Price
Technical It is a rise in the general price level caused by an
imbalance between the quantity of money and trade
“Inflation” has but one origin…..
The term “Inflation” originated as devaluation
of currency and not rise in price of goods as we
now know it.
In times when gold was used as currency, the
government or the king used dilution as a
measure to raise the profits through Seigniorage.
This practice increased the money supply but at
the same time lowered the relative value of each
coin. Due to this, more coins were needed for the
same goods & services.
Hence, the price rose.
A Walk down the timeline for some answers
1 A change in the value or resource costs.
Currency depreciation resulting from an increased
supply of currency relative to the quantity of
redeemable metal backing the currency.
A change in the ‘actual price of money’ which then
(was usually referred to the metallic content in the
Factors giving rise to concept of inflation
“Inflation is the process of making addition to currencies not based on
commensurate increase in production of goods
-Federal Reserves Bulletin
Later in the 19th century, the term ‘inflation’ originated as a direct reference
to currency depreciation or debasement, and not rise in price of goods.
Measures in terms of Price Index
Personal Consumptions Price IndexConsumer Price Index
Personal Consumptions Price Index : Average increase in prices for all domestic
The PCE rises about 1/3% less than the CPI, a trend that dates back to 1992. This may
be due to the failure of CPI to take into account substitution.
Consumer Price Index : Measures prices of a selection of goods and services purchased
by a “typical consumer”
Formula for calculating Inflation Rate:
(CPI2 – CPI1)
__________ * 100.
E.g. For USA, inflation rate = (211.080 – 202.416)/202.416 = 4.28 %
Other Widely Used Price Indices
Cost of Living Indices
Producer price indices
Commodity Price Indices
Core Price indices
1. GDP Deflator
2. Regional Inflation
3. Historical Inflation
Other Measures of Inflation
“An increase in the general level of prices implies a decrease in the purchasing power
A popular economic (Keynesian) theory proposes that money is
transparent to the real forces in the economy and the visible inflation
is the result of pressures in the economy expressing themselves in
On the contrary, another view(Monetarist view) believes that it is a result of
ineffective government fiscal policy, or spending and taxation.
Demand Pull Theory
Cost Push Theory Built-in Theory
Supply is not!
Demand Pull Theory
Cost Push Theory on the other hand states that
inflation occurs when the cost of producing rises
and the increase is passed on to the consumer.
Built-in theory attributes the rise in prices to adaptive
expectations, that is, workers trying to keep their wages up,
pass higher costs on to consumers in the form of higher prices.
Time Value of Money :
Time Value of Money is most commonly expressed in terms of
Interest it receives and inflation is the principal component affecting
The rates of interests.
Treasury of the Nation :
To assure that the public gets back their money,
governments like USA provide for Treasury Inflation-Protected
Securities (TIPS) that charge lesser interest rates. Therefore
The treasuries are adversely affected.
Allocation of Money:
Affects the dealing of lenders and borrowers because the loan sanctioned before the inflation
period are paid back later in the form of inflated money, i.e money with lesser relative value.
Purchasing Power of currency:
One of the most immediate effects of inflation is the
decrease in the purchasing power of currency owing
to the decrease in the relative value of currency.
Monetary Policy essentially implies the policy followed by financial institutions.
High interest rates and slow growth of the money supply are the traditional ways
through which central banks fight or prevent inflation..
Fixed Exchange Rates:
Under a fixed exchange rate currency regime, a country's currency is tied in value to
another measure of value such as gold. In this monetary system a region's common media of
exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of
Fiscal policies are effective in increasing the leakage rates from the circular income flow,
thereby rejecting all further additions into this particular flow of income.
A glimpse of inflation in India
• In 2008,India’s Economic Survey Report targeted a drop in India’s Inflation Rate from 5.77% to 4.1%.
However, the beginning of 2008 has seen a dramatic rise in the price of rice and other basic food stuffs.
Indeed, by July 2008, the key Indian Inflation Rate had risen above 11%, its highest rate in 13 years.
This is more than 6% higher than a year earlier and almost three times the RBI’s target of 4.1%.
India is deeply intolerant of high inflation accounting to very
conservative policy makers. The highest inflation that India
has ever seen in the past two centuries was 53.8%
•Hyperinflation in Zimbabwe has persisted since 2000, shortly after that country's confiscation of
white-owned farmland and its repudiation of debts to the International Monetary Fund.
Recent figures (as of 14 November 2008) estimate Zimbabwe's annual inflation rate at 89.7
sextillion (10^21) percent.
• Early in the 21st century Zimbabwe started to experience hyperinflation. Inflation reached
624 percent in early 2004, then fell back to low triple digits.
• On 16 February 2006, the governor of the Reserve Bank of Zimbabwe, Dr. Gideon Gono,
announced that the government had printed ZWD 21 trillion in order to buy foreign currency to
pay off IMF arrears.
The Reserve Bank of Zimbabwe issued a ZWD 10,000,000 note in January 2008,
roughly equivalent of 4 US dollars.
Zimbabwe's inflation soared to a record high of 26,470.8 percent as the economy
contracted by 6 percent, the central bank said.
We would like to thank following for assisting us in making this presentation :
3. Origin and Evolution of World Inflation by Michael F. Bryan.
4. International Price Levels and Global Inflation by Michael Ward.
5. LiveMint.com – Inflation, a short history.
7. Deepali Babbar