2. Topics Covered
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Introduction – Origin, Definition & Meaning
Effects of inflation
Causes of inflation
Types of inflation
Major Inflations in History
Measures to curb inflation
How is Inflation calculated?
Inflation in India
Issues with the inflation in India
3. Introduction
Origin
• The term “inflation” is from the Latin
term inflare, meaning to “blow up or
inflate”.
Meaning
• Situation where the prices of goods
and services increase.
• It is an indication in rise of general
level of prices.
4. Introduction
Definitions
• Crowther defines inflation as “a state in which
the value of money is falling, ie., prices are
rising”.
• Professor Samuelson defines “Inflation occurs
when the general level of prices and costs is
rising”.
• “Too many dollars chasing too few goods,”
Herb Stein.
5. Effects of inflation
What happens during Inflation
• OIL/PETROL PRICES RISE
• CNG PRICES RISE
• PADDY/WHEAT PRICES RISE
• SALARY NOT SUFFICIENT TO
MEET HOUSEHOLD EXPENSES
6. Effects of inflation
Inflation can create major problems
• Rise in prices will force people to spend only on essential/few items
which will force manufacturers to cut down production.
• Producers cant control prices because since prices go up, raw
materials also will cost more inturn pushing up the cost of the
goods.
• This could result in loss which could force them out of business.
• People would also save less and thus banks will have lesser money
to lend to manufacturers.
• Increase in prices could worsen the poverty affecting low income
household
• Manufacturers will not spend on research and new technology thus
resulting in job loss/unemployment.
• Govt will increase TAX
• Decrease in production will result in lesser exports and more
imports thus adversly affecting BALANCE OF PAYMENTS position of
the country.
7. Causes of inflation
Demand &
Supply
• PRICES rise when there is either more
DEMAND for goods or when there is a shortage
of SUPPLY of goods.
• Thus either increase in DEMAND or decrease in
SUPPLY will cause inflation.
• So, lets check factors affecting both DEMAND
and SUPPLY which cause inflation.
8. Causes of inflation
Factors affecting Demand
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Increase in disposable income with the people
Increase in customer spending
Cheap monetary policies
Expansion of private sector
Increase in exports
Repayment of public debts
Deficit financing (borrowing from public)
Black Money
9. Causes of inflation
Factors affecting Supply
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Natural Calamities
Artificial Scarcities
Industrial Dispute
Fall in industrial growth
Rise in exports
Focus on non essential items by
manufacturers/producers
• Agriculture price policy
• Increase in administered prices
• International Factors
11. Types of inflation
Demand Pull
• Occurs, when people’s ability to
spend rises more rapidly than the
availability of goods and services.
Cost Push
• Occurs, when rising costs
result in increased prices .
12. Major inflations in history
• ZIMBABWE – 2009
•GERMANY– 1923-25 (WWII)
•HUNGARY–1922-24;1944-46 (WWII)
•JAPAN – 1944-48 (WWII)
•BRAZIL – 1986-84
•ARGENTINA –1975-1991 (Budget deficit)
•RUSSIA –1921-22;1992-94 (Bolshevik
revolution & Post soviet revolution)
13. Major inflations in history
Highest Inflation rates
• HUNGARY (1946) – 1.295 X 10^16
•ZIMBABWE (2008) –79,600,000,000%
•YUGOSLAVIA(1994) – 313,000,000%
•GERMANY(1923) – 29500%
•GREECE (1944) – 11300%
•CHINA (1949) – 4210%
14. Major inflations in history
Occurances during such inflati
•Germany - Notes were used as fuel instead of
firewood
•Zimbabwe issued notes worth 10 trillion
•Zimbabwe – During inflation prices rose every 12
hours
•Hungary issued the largest denomination notes in
history i.e with a face value of 100 quintillion PENGO
•In Germany people used WHEEL BARRONS to buy
bread
15. Methods to control inflation
•MONETORY MEASURES
•FISCAL MEASURES
•OTHERS
16. Methods to control inflation
MONETORY MEASURES
• CREDIT CONTROL
•ISSUE OF NEW CURRENCY NOTES
•DEMONITIZATION OF CURRENCY
(reduce/put out of circulation high value notes)
17. Methods to control inflation
FISCAL
MEASURES
• INCREASE TAXES
•INDUCE SAVINGS
•UNNECCESSARY EXPENDITURE (govt to reduce)
•PUBLIC DEBIT (stop payment/post pone)
•Surplus Budgets
18. Methods to control inflation
OTHER
MEASURES
• INCREASE PRODUCTION
• WAGE POLICY
•PRICE CONTROL
•RATIONING
19. How is inflation measured?
•Consumer Price
Index
•Wholesale Price
Index
20. How is inflation measured?
• Consumer Price
• Statistical estimate of prices of goods &
Index for consumption by
services bought
households
• Measures price change for constant market
basket of goods & services from one period to
another.
• Price index determined by measuring the
price of the standard group of goods meant to
represent the typical market basket of a
consumer.
21. How is inflation measured?
• Wholesale Price
• First published in 1902 but replaced in 1970
Index use it, India is one among them
• Very few countries
• Encompasses 2400 commodities
• Is the index used to measure change in any price level
of goods and services traded in WHOLESALE market.
• Focuses on prices of goods traded between
corporations.
• Has 5 groups – Agriculture, Mining, Quarry,
Manufacturing & Import & Export
22. Inflation in India
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India follows Whole Sale Price Index (WPI )
Highest inflation in India was 53.8% in 200 years
In 2008 it went upto 11% which was highest in 13 yrs
Average inflation since 1997 is 7%
However FOOD prices have raised and Food index is
presently close to 20%
•This is how food prices have risen since 2007:
Food articles: 7.02% (in 2007) to 17.41% in January 2010.
Food products: 3.43% (in 2007) to 22.55% in January 2010.
Food commodities: 5.60% (in 2007) to 19.42% in January 2010.
Foodgrains: 6.27% (in 2007) to 17.89% in January 2010.
Cereals: 6.27% (in 2007) to 13.69% in January 2010.
Pulses: 2.14% (in 2007) to 45.62% in 2007 in January 2010.
Rice: 6.05% (in 2007) to 12.02% in January 2010.
Wheat: 6.77% (in 2007) to 14.86% in January 2010.
Dairy products: 6.08% (in 2007) to 12.87% in January 2010.
Eggs, fish and meat: 6.38% (in 2007) to 30.71% in January 2010.
Sugar: (-)14.69% (in 2007) to 58.94% in January 2010.
23. Inflation in India
Measures undertaken to curb inflation
• Step up domestic supply
• Bridge the gap by imports.
• Given duty concessions.
• Allowed duty-free imports by putting
items under OGL (open general licence).'
•Subsidised articles like edible oil
•Increase in rates (CRR, REPO etc)
24. Inflation in India
Problems with adopting WPI index to measure
inflation of our economy
• WPI only , captures price movement of only
wholesale goods and doesn’t take into account retail
margins and doesn’t give the accurate picture of
inflation
•WPI also doesn’t encompass some important service
industries which the retails consumer invest in heavily
v.i.z., health, education.
•WPI measure change in prices of wholesale goods
which doesn’t impact the consumer at large.
•Many commodities taken into WPI doesn’t enter into
the consumers basket.
