2. Variations of Inflation
3. Calculation of Inflation
4. Keynisian view of Inflation/Causes of Inflation
5. Effects of Inflation
6. Methods to Control Inflation
7. Is inflation good or bad?
8. Inflation and GDP
• Inflation means increase in the money supply or sustained
increase in the general price level of goods and services in an
economy normally owing to increase in money supply.
• When money supply increase, price level of products increase and
each unit of currency buys lower quantity of products.
• As a result, inflation results in reduction in purchasing power per
unit of currency.
• In a more technical way, it is rise in general price level caused by
an imbalance between the quantity of money and trade needs.
•Deflation : This is the opposite of inflation i.e. the fall in general price level of products. Many people have heard about the
deflation in Chinese Economy in 2014 to current timeline. Their economy is currently in painful transition from Investment
based economy to Consumer Spending. The prices of Chinese products have further decreased and Yuan Has devaluated.
The markets are rapidly decreasing and they are more vulnerable. The gigantic Chinese economy will in fact effect the other
economy which is based on it. American Dreams are made in China. I mean to say about the product manufacturing
outsourcing to china. So, as a result, American Economy too will face the outcome.
Hyperinflation : It is unusually rapid inflation. It can lead to breakdown of national economy.
Most recent example is Zimbabwe in 2008 Prices doubled here every 24.7 hours in November
2008 and inflation reached levels of 79 billion-odd %. They eventually stopped using the
official currency and switched to the South African Rand or the $US. A loaf of bread ended up
costing $35 million. This is the most recent case. It was Mugabe’s land-redistribution program
that caused this. Other unofficial case is my own country, Nepal in 2015 where due to months
long strike, the prices of products nearly doubled and that of gases nearly tripled.
Stagflation: It is the result of the combination of high unemployment and economic stagnation
with inflation. Most recent case is of Argentina in 2012 where industrial production slumped to
all time high and as result majority of population was unemployed. Stagflation was visible in
the market of properties in the country. Home sales and construction declined very much and
as a result even these remained out of clutches of middle class people
Calculation of inflation
• Most countries(USA and India included) calculate the movement in price
index usually called the Consumer Price Index(CPI). In US, it is calculated by
Department of Labor Statistics.
• In UK Retail Prices Index is used, which is more broader than CPI as it
contains broader basket of goods and services.
• Other widely used price indices are Producer price indices, Commodity price
indices, Core Price Indices, etc.
• CPI uses the data collected by surveying households to quantify the rational
consumer’s spending on specific products and weigh in the average prices of
those items accordingly.
• To better relate over time, a base year is chosen and index of 100 is
• When looking at inflation rate, Economic institution (Central Banks) only look
at certain indices of specific goods to formulate the monetary policy.
• Formulae: Current Index Less Base Index 100
• Base Index
Keynesian VIEW or Causes of
It is one of the most popular view by
Keynesian economists. They propose
that changes in money supply do not
directly affect prices of products and
apparent inflation is the result of the
expression of economy itself in prices.
As per this view, there are three major
types of inflation:
1. Demand Pull Inflation
2. Cost Push Inflation
3. Built-in inflation
This view is also popularly called
Regressive effect of
inflation hits the
lower income families.
In a nutshell, rich
becomes richer and
poor becomes poorer
Negative Real Interest
Rates: Inflation eats
up savings . If rate of
savings is less than
rate of inflation, the
people who depends
on their saving
deposits will be hit
Cost of Borrowing:
Inflation is well
reflected in higher
cost of borrowing also
as the financial
institution will also
tend to reduce the
impact of inflation on
them through these
will be very much
volatile if inflation is
not stable. Stable
inflation can be
complied to but it
takes a lot of
resources to cope to
Other effects: 1.
Hoarding and Black
4. Hinders Foreign
Monetory Policy: The
central bank can
increase interest rate
of borrowings and
attractive. A higher
interest rate increases
exchange rate which
helps to reduce
by making imports
cheap and reducing
demand for exports
Fiscal Policy: The
increase taxes and cut
its spending . This
improves the budget
situation and helps to
situation in the
economy. Fiscal Policy
is nothing but annual
2 months before start
of new fiscal year.
Powerful labor unions
demand for higher
wages which can
Limiting wage growth
inflation. However it is
extremely difficult to
due to prevalence of
Money Supply: It
would take detailed
study of economy to
supply will control
inflation or not.
Recent pasts show
money supply can
control inflation while
there has also been
2. Prices Control
3. Gold and Silver
METHODS TO CONTROL
• Inflation is a highly debated subject. The term has has to be
understood in different economic conditions separately.
• However, acceptable rate of inflation is good for economy as it
stabilizes economy by increasing economic output and
productivity while creating opportunities for employment.
• Neither low inflation nor high inflation is good for the economy.
The crux would be steady rate of inflation is good as it introduces
• However the rate of inflation is to be seen from macroeconomic
variables of economy
• From above you must have got confused. So, it is really a open
debate as inflation requires various angles. Every economists have
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