2. INFLATION
‘
“LENIN IS SAID TO HAVE DECLARED THAT THE BEST
WAY TO DESTROY THE CAPITALIST SYSTEM WAS TO
DEBAUCH THE CURRENCY. BY A CONTINUING
PROCESS OF INFLATION, GOVERNMENTS CAN
CONFISCATE, SECRETLY AND UNOBSERVED, AN
IMPORTANT PART OF THE WEALTH OF THEIR
CITIZENS.”-
J.M.KEYNES
3. INFLATION:
DURING THE LATE 1970S AND THE SECOND
HALF OF 1980S, INFLATION BECAME A
MAJOR PROBLEM.
HOWEVER, MORE OFTEN THAN NOT,
INFLATION IS MISUNDERSTOOD AS PRICE
RISE ALONE.
IT IS THEREFORE IMPORTANT TO
DISTINGUISH BETWEEN A RISE IN THE
AVERAGE LEVEL OF PRICES (INFLATION)
AND A CHANGE IN RELATIVE / TEMPORARY
PRICES.
4. WHAT IS INFLATION?
“INFLATION IS A PROCESS OF STEADY
AND SUSTAINED RISE IN PRICES”
PROF. MILTON FRIEDMAN
5. WHAT IS INFLATION?
“INFLATION OCCURS WHEN THE
GENERAL LEVEL OF PRICES AND
COSTS IS RISING – RISING PRICES
FOR BREAD, GASOLINE, CARS; RISING
WAGES, LAND PRICES, RENTALS ON
CAPITAL GOODS”
PROF. PAUL SAMUELSON
6. WHAT IS INFLATION?
INFLATION, THEREFORE, REFERS TO A
GENERAL AND SUSTAINED RISE IN PRICE-
LEVEL, AND NOT INDIVIDUAL PRICES.
INFLATION IS AN INCREASE IN THE
AVERAGE LEVEL OF PRICES.
DEFLATION IS A FALL IN THE AVERAGE
PRICE LEVEL .
7. INFLATION:
IN INDIA,
INFLATION IS CALCULATED
BY USING PRICE INDEXES
-CPI AND WPI-
WHICH ARE WEIGHTED AVERAGES OF THE
PRICES OF A NUMBER OF INDIVIDUAL
PRODUCTS.
9. ONE VIEW
TYPES OF INFLATION…..
INFLATION COULD BE
LOW/CREEPING INFLATION,
GALLOPING INFLATION, OR
HYPER INFLATION.
10. TYPES OF INFLATION :
LOW/CREEPING INFLATION
THIS IS CHARACTERIZED BY PRICES
THAT RISE SLOWLY AND
PREDICTABLY-TYPICALLY SINGLE-
DIGIT ANNUAL INFLATION RATES.
HERE PEOPLE TRUST MONEY.
11. TYPES OF INFLATION:
GALLOPING INFLATION
THIS IS INFLATION IN THE DOUBLE-
DIGIT OR TRIPLE-DIGIT RANGE OF
20,100 OR 200 PERCENT A YEAR –
ALSO CALLED ‘VERY HIGH INFLATION
’THIS IS RELATIVELY COMMON,
PARTICULARLY IN COUNTRIES
SUFFERING FROM WAR, WEAK
GOVERNMENTS OR REVOLUTION.
12. TYPES OF INFLATION:
GALLOPING INFLATION
MANY LATIN AMERICAN COUNTRIES
SUCH AS ARGENTINA, CHILE AND
BRAZIL
HAD INFLATION RATES OF 50 TO 700
PERCENT PER YEAR IN THE 1970S AND
1980S.
THIS RESULTS IN
SERIOUS ECONOMIC DISTORTIONS
13. TYPES OF INFLATION:
HYPERINFLATION
WHILE ECONOMIES SEEM TO SURVIVE
UNDER GALLOPING INFLATION,
A THIRD AND DEADLY STRAIN TAKES
HOLD WHEN THE CANCER OF
HYPERINFLATION STRIKES.
HERE PRICES ARE RISING A MILLION
OR EVEN A TRILLION PERCENT PER
YEAR WITH DISASTROUS ECONOMIC
AND SOCIAL IMPACTS.
14. ANOTHER VIEW
TYPES OF INFLATION …..
IT COULD ALSO BE ATTRIBUTED TO
PUSH FACTORS OR
PULL FACTORS.
BASED ON THESE FACTORS,
INFLATION CAN BE OF TWO TYPES:
DEMAND-PULL INFLATION
COST-PUSH INFLATION
15. WHAT FACTORS AFFECT
DEMAND-PULL INFLATION?
INCREASED PUBLIC EXPENDITURE
INCREASE IN PRIVATE EXPENDITURE
INCREASE IN FOREIGN DEMAND
REDUCTION IN TAXATION
REPAYMENT OF INTERNAL DEBTS
CHANGES IN EXPECTATIONS
16. WHAT FACTORS AFFECT
COST-PUSH INFLATION?
SCARCITY OF THE FACTORS OF
PRODUCTION
BOTTLENECKS
NATURAL CALAMITIES
HOARDING BY MERCHANTS
RISE IN COSTS.
17. IMPACT OF INFLATION
WHILE THERE IS CONSIDERABLE
CONTROVERSY ABOUT WHETHER ANY
INFLATIONARY PRESSURES SHOULD BE
ALLOWED TO BE BUILT / DEVELOPED IN AN
ECONOMY,
THERE SEEMS TO BE A GENERAL CONSENSUS
THAT A MODERATE RATE OF INFLATION MAY
ACTUALLY BE GOOD FOR THE ECONOMY AS IT
IS FELT THAT A SMALLER RATE OF INFLATION
MAKES IT EASIER FOR THE ECONOMY TO
ADJUST TO CHANGES AND TO MAINTAIN A
HIGH LEVEL OF EMPLOYMENT.
18. IMPACT OF INFLATION
INFLATION AFFECTS THE ECONOMY BY
REDISTRIBUTING INCOME AND
WEALTH AND BY IMPAIRING
EFFICIENCY.
UNANTICIPATED INFLATION USUALLY
FAVORS DEBTORS, PROFIT-SEEKERS
AND RISK- TAKING SPECULATORS.
19. IMPACT OF INFLATION
IT LEADS TO DISTORTIONS IN
RELATIVE PRICES, TAX RATES AND
REAL INTEREST RATES.
INTER-SECTORAL TERMS OF THE
TRADE ADVERSELY AFFECT THE
POOR.
BALANCE OF PAYMENTS GO INTO
DEFICIT. (EXPORT BECOME COSTLY)
20. IMPACT OF INFLATION
> CONSUMPTION LEVELS OF THE
POOR ARE REDUCED AND THE
CONDITIONS OF THE POOR
DETERIORATES.
> INEQUALITIES IN INCOME RISE
> DEVELOPMENT OF THE ECONOMY
GETS A SET-BACK AS INVESTMENT &
SAVINGS SUFFER.
21. A QUICK LOOK…..
POSITIVE EFFECTS
ENSURING CENTRAL BANKS CAN ADJUST
NOMINAL INTEREST RATES.
22. A QUICK LOOK…..
NEGATIVE EFFECTS
A DECREASE IN THE REAL VALUE OF MONEY AND
OTHER MONETARY ITEMS OVER TIME.
UNCERTAINTY OVER FUTURE INFLATION MAY
DISCOURAGE INVESTMENT AND SAVINGS.
HIGH INFLATION MAY LEAD TO SHORTAGES OF
GOODS IF CONSUMERS BEGIN HOARDING OUT
OF CONCERN THAT PRICES WILL INCREASE IN
THE FUTURE.
23. WHAT WOULD YOU DO TO
CONTAIN IMPACT OF
INFLATION ON YOUR
BUSINESS ORGANISATION?
