This document discusses inflation, including types of inflation, causes of inflation, and measures to control inflation. It provides examples of extreme hyperinflation cases in countries like Hungary, Zimbabwe, Yugoslavia/Republika Srpska, Germany, and Greece. The main points are: (1) Inflation is a sustained increase in prices over time, reducing purchasing power. (2) Causes include excess demand/money supply and increasing costs. (3) Control measures center on monetary policies like interest rates and reserves, fiscal policies, and output/price controls. (4) Examples show how hyperinflation reached monthly rates over 10,000% and prices doubled within hours or days.
4. Inflation
⢠Inflation is a sustained increase in the general price level of the goods
and services in an economy over a period of time.
⢠Reduction in the purchasing power per unit of money-a loss of real value
in the medium of exchange and unit of account within the economy.
⢠Measured as percentage rate of change of price index.
⢠The annualised inflation rate in India is 5.4% as of June 2015, as per
the Indian Ministry of Statistics and Programme Implementation.
5. Types of Inflation
⢠prices rise by not more than 3% per annum (year)
Creeping Inflation
⢠If creeping inflation persist (continues to increase) for a longer period of time
Chronic Inflation
⢠rate of rising prices is more than the Creeping Inflation
⢠prices rise by more than 3% but less than 10% per annum(single digit)
Walking or Moderate Inflation
6. Types of Inflation
⢠price rise between 10% to 20% per annum (double digit inflation rate)
Running Inflation
⢠prices rise by more than 20% but less than 1000% per annum(double or triple
digit inflation rates)
Galloping Inflation
⢠prices rise so fast that it becomes very difficult to measure its magnitude
⢠prices rise above 1000% per annum (quadruple or four digit inflation rate)
Hyperinflation
7. Causes of Inflation
There are two theories related to the causes of the inflation
1. Demand pull inflation
⢠Excess aggregate demand in the overall economy
⢠Business respond to high demand by raising prices to increase profit
margin
8. Causes of Inflation
2. Cost push inflation
ďśCost of production or operation are increasing due to
⢠Increase in wages
⢠Increase in cost of production inputs
⢠Increased cost of imported components
9. Measures to Control Inflation
The basic causes of the Inflation
are
1.Excess money supply in an
Economy
2.Excess purchasing power in the
hands of public.
So it is more important to deal with
these factors to bring inflation in
control.
⢠Adopted by the Central Bank
of a Country (RBI)
Monetary Measures
⢠Adopted by the Government
Fiscal Measures
Other Measures
10. Monetary Measures
To control the Money Supply
ďśBank Rate Policy or Credit Control
ďśCash Reserve Ratio
ďśOpen Market Operation
ďśMaintaining Gold Standard
ďśFixed Exchange Rates
11. Bank Rate Policy
⢠Bank rate-Interest rate at which RBI lends money to the domestic banks
ď§ Increase in bank rates leads to â Increase in deposit rate
- Increase in lending rate
⢠Discourages businessmen and consumers to take loans
⢠Hence the controlled supply of money reduces the inflationary pressure
on the economy
12. Open Market Operations
⢠Sales and purchase of government securities and bonds by the central
bank.
⢠Gov. securities- Bonds & Debentures with certain maturity period
are issued by a government to raise the fund necessary to pay for its
expenses.
⢠Sale of the securities in the open market helps to regulate the inflation.
13. Cash Reserve Ratio
⢠Banks are required to hold a certain proportion of the deposit in the
form of cash.
⢠Higher the Cash Reserve Ratio=> Lower the amount for lending and
investments with the banks.
⢠Tool for the RBI to control the amount that banks lent
i.e. to control the liquidity in the banking system and the country.
14. Maintaining Gold Standard & Fixed
Exchange Rates
⢠Fix the prices of their domestic currencies in terms of a specified
amount of gold.
⢠National money and other forms of money (bank deposits and notes)
were freely converted into gold at the fixed price.
⢠A country's exchange rate regime under which the government or
central bank ties the official exchange rate to another country's
currency
⢠Because exchange rates were fixed, the gold standard caused price levels
around the world to move together.
15. Fiscal Measures
⢠Government Expenditure-Gov. has to reduce their expenditure and
increase their savings to control the supply of money
⢠Taxation-Increasing some tax rates and imposing some new taxes
⢠Public Borrowings- the objective is to take away from the public excess
purchasing power. Public borrowing may be voluntary or compulsory.
⢠Debt Management-Stop the repayment of public debt to control the
inflationary pressure
⢠Adopt surplus budget
16. Fiscal Measures
ďąOver-valuation-To control the over valuation of money it is essential to
encourage imports and discourage exports
Overvaluation of domestic currency in terms of foreign currencies will
serve as an anti-inflationary measure as
(i) it will discourage exports and thereby result in an increased
availability of good and services at home
(ii) encourage imports â add to domestic stock of goods and services,
(iii) by lowering the price of foreign inputs, it will help in checking the
upward cost-price spiral.
17. Other Measures
ďąExpansion of Output
⢠This lowers the excess demand of a commodity and lowers its price.
ďąRational Wage Policy
⢠Wages should be allowed to rise only if there is an increase in the productivity
⢠In such a situation, higher wages will not give rise to higher costs and
hence to higher prices
ďąPrice Control & Rationing
⢠The objective of price control is to lay down the upper limit beyond which, the
price of a particular commodity will not be allowed to rise.
⢠Demand can also be controlled through rationing of essential commodities
20. Highest monthly inflation
rate: 13,600,000,000,000,000%
Highest currency denomination: One trillion
Time it took prices to double: 15.6 hours
21. HUNGARY
⢠Hungaryâs hyperinflation of 1945-46 was the most severe instance of
hyperinflation in history. Costs of preparing for World War II led to loose
monetary policy and depreciation of the Hungarian pengĹ currency. At
the end of the war the Hungarian government began rampantly printing
money. Denominations got so high that milpengĹ (1 million pengĹ) and
bilpengĹ (1 billion pengĹ) denominations were introduced to reduce the
number of zeros and make calculations easier. Prices could more than
double in just one day. A new currency called the forint was introduced
in 1946, and old pengĹ were littered in the streets.
26. Causes
⢠Post Independence Land Re-distribution System-During the reform
program most of the farm lands were taken over by local people and
other government officials who had only little knowledge about the
agriculture and related activities.
⢠War Funding-Mugabe government printed more money to help
financing the war
⢠Economic Mismanagement-Over-printing of money-To deal with the
issue of financial crunch which the war brought, the govt printed money
and a lot of them
27. Causes
⢠Governments often implement price controls in an attempt to control
inflation. This frequently leads to shortages, as producers opt for
alternative markets to avoid the mandated price ceilings that donât cover
production costs.
28. Effects of Hyperinflation in
Zimbabwe
⢠Severe Unemployment
⢠Severe food crisis
⢠Population Displacement-
34. Highest monthly inflation rate: 13,800%
Highest currency denomination: 100
billion
Time it took prices to double: 4.3 days
35. POLICY IN INDIA REGARDING INFLATION
⢠The Reserve Bank of Indiaâs (RBI) has a target of 8% by January 2015
and 6% by January 2016.
⢠Recently, while cutting the CRR rates by 0.25 basis points, RBI said
higher diesel prices would increase inflation in the short term, but the
reform measures were âsignificantâ as they would strengthen the
countryâs economic fundamentals.
⢠The central bank said the governmentâs recent actions had paved the
way for more favourable economic conditions by initiating a shift in
expenditure away from consumption by reducing fuel subsidies and
toward investment, including through foreign direct investment. Further,
RBI is supposedly did not reduced the interest rates just to not to put
pressure on the inflation.
