INFLATION AND DEFLATION
BY Dr.Neerja Sharma
City Premium College ,Nagpur

Introduction
• Inflation happens when the price of goods and services
increase, while deflation takes place when the price of
the goods and services decrease in the country.
Inflation and deflation are the opposite sides of the
same coin.
• Maintaining the balance between these two economic
conditions, i.e. inflation and deflation is essential as the
economy can quickly swing from one condition to the
other as a result of these two conditions. The Reserve
Bank of India keeps an eye on the levels of price
changes and controls deflation or inflation by
conducting monetary policy, such as setting interest
rates in India.

Inflation
• Inflation is the rate at which the prices for goods and services increase. Inflation
often affects the buying capacity of consumers. Most Central banks try to limit
inflation in order to keep their respective economies functioning efficiently. There
are certain advantages as well as disadvantages to inflation.
• Inflation refers to the increase in the prices of the goods and services of daily use,
such as food, housing, clothing, transport, recreation, consumer staples, etc.
Inflation is measured by taking into consideration the average price change in a
basket of commodities and services over a period of time.
Inflation is calculated in India by the Ministry of Statistics and Programme
Implementation.
• A simple example would be, suppose a kg of apple cost Rs.100 in 2019 and it cost
Rs.110 in 2020, then there would be a 10% increase in the cost of a kg of apple. In
the same way, many commodities and services whose prices have raised over time
are put in a group and the percentage is calculated by keeping a year as the base
year. The percentage of increase in prices of the group of commodities is the rate
of inflation.

Summary of the main causes of
inflation
• Demand-pull inflation – aggregate demand growing faster
than aggregate supply (growth too rapid)
• Cost-push inflation – For example, higher oil prices feeding
through into higher costs.
• Devaluation – increasing cost of imported goods, and also
the boost to domestic demand.
• Rising wages – higher wages increase firms costs and
increase consumers’ disposable income to spend more.
• Expectations of inflation – High inflation expectations
causes workers to demand wage increases and firms to
push up prices.

Types of inflation

Effects of inflation on society and politics
• In an inflationary environment, unevenly rising prices
inevitably reduce the purchasing power of some
consumers, and this erosion of real income is the single
biggest cost of inflation. Inflation can also distort
purchasing power over time for recipients and payers of
fixed interest rates.
• Government Finance: During the period of
inflation, government revenue will increase as more
income is obtained from income tax, sales tax,
consumption tax, etc. Similarly, as the government needs
to spend more and more money for administrative and
other purposes, public spending will increase.

Causes of Inflation and Deflation
Increase in aggregate supply Decrease in aggregate supply
Increase in public expenditure Less production
Deficit financing Artificial scarcity
Cheap monetary policy Taxation policy
Increase in investment Shortage of food grains
Black money Industrial Disputes
Reduction in Taxes Technical change
Less public Borrowings Lack of raw materials
Natural clamities

Deflation is Considered Inexpedient on the Following Grounds: Deflation, by reducing
prices and production, results in a marked decline in the national income of the
country. The country becomes poorer than before. By leading to a fall in production,
deflation causes a marked increase in unemployment.
The negative effects of inflation include an increase in the opportunity cost of
holding money, uncertainty over future inflation which may discourage investment
and savings, and if inflation were rapid enough, shortages of goods as consumers
begin hoarding out of concern that prices will increase in the future