Inflation

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Inflation

  1. 1. BySrividya VVarsha R
  2. 2.  What is Inflation? Related Terms Types of Inflation Measurement of Inflation Stages of Inflation Inflation Accounting Causes Effects Costs of Inflation Relation with GDP, Currency Measures to keep inflation in check Indian Economy & Inflation Conclusion
  3. 3.  Inflationis a sustained increase in the general level of prices of goods and services in an economy over a period of time. decreasein purchasing power of money.
  4. 4. 1956 Commodities 2011(Rupees (Rupees Per Kg) Per Kg) .30 Rice 32 .25 Wheat 35 3 Almonds 350 .20 Potato 16
  5. 5. Deflation DisflationReflation Stagflation
  6. 6. Related to basic economic principles of supply and demand : Increase in the money supply. Increase in the aggregate demand for goods and services. Commercial Policies Deficit Financing Banking policies Increasing costs of production Anti – social activities
  7. 7. On rising prices Oncauses
  8. 8. Creeping inflationWalking InflationRunning InflationGalloping Inflation Hyper inflation
  9. 9. Demand Pull Inflation Cost Push Inflation Increase in aggregate  Cost push inflation Demand succeeds Demand-pull inflation More money chases relatively less quantity  Demand for factors of of goods and services Production increases excess of demand  Prices are “pushed up” pushes up the prices of by increase in costs of goods and services factors of production
  10. 10. Goods that are representative of theeconomy are put together market basket
  11. 11.  Adopted by countries such as India, Philippines etc Uses 435 commodities for inflation calculation which represent various strata of the economy It is calculated on a base year and In India base year is 2004-05 WPI = Base yr price (Rs 100) + rate of increase in price from base yr till the yr under consideration
  12. 12.  Weighted average of 435 commodities to arrive at overall WPI Weights depend on the commodities influence on economy (WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100 For example, WPI on Jan 1st 2010 is 106 and WPI of Jan 1st 2011 is 109 then inflation rate for the year 2010 is (109 – 106)/106 x 100 = 3.42%
  13. 13.  Adopted by countries such as USA, UK, Japan and China. commodities for inflation calculation are the goods and services purchased by a “typical consumer” For instance, in January 2007, the U.S. Consumer Price Index was 202.4, and in January 2008 it was 211 (211.08-202.41)/202.41*100 = 4.28%
  14. 14.  Index prices are expressed in relation to the base year price Modifying the weights assigned to the goods New products may be introduced, older products disappear but both the sorts of goods are included in the "basket“ Inflation numbers are often seasonally adjusted May focus only on certain kinds of prices, or special indices
  15. 15. Pre-fullemployment stage Full employment stage Post-full employment stage
  16. 16.  Adjusting the financial statements as per the changes in the purchasing power of money. Two ways of restatement/adjustment Accounting for Current purchasing power of rupee Current cost accounting
  17. 17.  Wholesale price index of RBI is used Distinction between Monetary and Non-Monetary items Only Non-Monetary items need to be restated Ex : Investments were made at a cost of Rs 6L in July 2005 and price index was 300. On 31st Mar 2011 price index is 320 and market value of investment is 6,10,000/- Loss = Cost – Market value6L*320 = 6.4L 6.1L 300 Loss= 30,000/-
  18. 18.  Takes into account the price changes relevant to the particular firm/Industry and not economy as a whole Important features Fixed assets are shown at their current value Stocks are shown at the value of their business Depreciation is calculated on current values Difference between current values and depreciated costs of FA is transferred to revaluation reserve a/c
  19. 19.  Depreciation adjustmentParticulars Historical Cost Current Cost Accounting AccountingValue of the asset 50,000 1,00,000Current depreciation 5,000 10,000Accumulated dep (Op bal) 15,000 30,000Total accumulated dep 20,000 40,000Balance sheet value (WDV) 30,000 60,000 Backlog depreciation= 1,00,000-60,000-(15,000+10,000) = 15,000Should be charged to revaluation reserve
  20. 20. Effects on production Distributional effects Other effects Misallocation of Debtors and resources Government creditors Reduction in Business Balance of saving community payments Hinders foreign Fixed Income capital groups Exchange rate Investors Social Farmers
  21. 21.  Business Growth Plunging Debt Values Stock Values Increases Asset Values Increases
  22. 22.  International competitiveness Confusion and Uncertainty Shoe leather costs Income redistribution Boom and Bust Economic Cycles Cost of Reducing Inflation Fiscal Drag
  23. 23.  People spend more and GDP increases “The Slippery Slope” Too much of GDP growth is dangerous as it leads to increase in inflation If GDP was calculated to be 6% higher than the previous year, but inflation was measured 2% then the GDP rate to be reported is 4% GDP figures are reported after adjusting for inflation.
  24. 24. Relationship between inflation and interest rates for a particular currency decide whether or not that currency is growing stronger or weaker Buying power Increase theIncrease in money Prices will of money is bank interest supply increase eroded rates
  25. 25.  Zimbabwe’s inflation was 1,00,000% in 2008 and was recorded as highest in the world !!! 1USD = 25 million Zimbabwean dollar Issued a 100 trillion Zimbabwe dollar note Excess Supply of Money which is not supported by growth of Output of Goods and Services
  26. 26.  It is neither high nor steady Despite high inflation and colossal corruption patterns - India overcame the reparation done by global recession with little slower growth rate The latest data of the government food price index shows they jumped almost 17% last financial year Inflation, interest rates, fiscal deficit, current account deficit and depreciation of local currency could be the reason for slowing down the economic growth
  27. 27. Inflation Rate14 1212 10.910 8.4 8.5 7.65 8 5.8 6.4 6 3.8 3.8 4.2 4 Inflation Rate 2 0
  28. 28.  Combined Consumer Price Inflation stood at an annual 7.65% This was the first time Consumer Price Inflation Data released by CSO Government had been relying on WPI data which economists say, does not capture the inflation situation fully Globally, Central Banks and Policy Makers rely on CPI Data
  29. 29.  Oils, milk and milk products, Fruits, Clothing, fuel continued to remain stubborn. Vegetables Prices declined an annual 24.87% Economists said its difficult to draw any conclusion from the CPI data – lacks history RBI has raised interest rates 13 times since march 2010 to tame price pressures CPI data showed that inflation continues to remain firm
  30. 30. Monetary Fiscal Measures Other MeasuresPolicies • Reduction in • Increase in• Issue of New Public Expenditure Production Currency • Increase in Taxes • Proper commercial• Cash Reserve Ratio • Increase in policy• Bank Rate of Imports • Encouragement to Interest • Decrease in saving Exports
  31. 31. You now know that inflation isnt basically good or bad. When inflation goes up, there is a decline in the purchasing power of money. Variations on inflation include deflation and stagflation. Two theories as to the cause of inflation are demand-pull inflation and cost-push inflation. Lack of inflation is not necessarily a good thing. Inflation is a serious problem for fixed income investors.

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