This document discusses inflation, including its definition, types, theories, causes, and impact in India. Inflation is defined as a rise in general price levels over time. The main causes of inflation are an increase in demand for goods/services and a decrease in supply. There are two theories of inflation - demand-pull (excess demand) and cost-push (rising costs). Factors that can cause inflation include increased money supply, disposable income, deficit financing, and foreign exchange reserves on the demand side, and rising administered prices, erratic agriculture, price policies, and inadequate industry on the supply side. Measures to control inflation focus on underlying causes and include investment, interest rate adjustments, demonetization, fiscal

1. INFLATION
SARAVANAN S

2. What is
Inflation ? Inflation :  Inflation is defined as a rise in the general price
level over a period of time.
 In other words, prices of many goods and
services such as housing apparel, food,
transportation, and fuel become dearer during
inflation.
Deflation :  Deflation is defined as fall in the general price
level over a period of time.
Both Inflation and Deflation create Problems…
What happens during Inflation : Value of Money goes down↓↓ and Prices rise High↑↑

3. Types of Inflation
 Creeping Inflation
Walking or trotting Inflation
 Running Inflation
 Galloping Inflation
 Hyper Inflation

4. Theories and Causes of Inflation
The main cause of inflation is the increase in the demand of goods
and services and at the same time decrease in the supply of goods
and services.
There are two theories related to the causes of inflation:
Demand-pull (when there is excess demand), and
Cost-push (when costs rise)

5. Theories and Causes of Inflation
Demand Pull Inflation –
This occurs when there is excess
aggregate demand in the economy
(overall) or in a specific market or
industry.
Businesses respond to high demand
by
raising prices to increase their profit
margin

6. Theories and Causes of Inflation
• Cost – push Inflation :
This occurs when costs of production or
operation are increasing.
• Cost Push inflation is mainly caused due to
the following factors:
· increase in wages.
· increase in cost of
raw materials
· increased cost of
imported components
(import-push inflation)

7. Growth vs. Inflation: India, 1951-2011
Period
Average annual
growth rate of GDP at
constant prices
(%)
Average annual
rate of
WPI inflation
(%)
2005-06 to 2010-11 8.47 6.55
2000-01 to 2005-06 6.93 4.68
1995-96 to 2000-01 5.92 5.07
1990-95 to 1995-96 5.38 10.18
1980-81 to 1990-91 5.64 8.51
1970-71 to 1980-81 3.16 10.28
1960-61 to 1970-71 3.75 6.24
1950-51 to 1960-61 3.94 1.75
WPI - Wholesale Price Index
- measured weekly in India
The Indian evidence above shows the lack of any simple
unidirectional relationship between inflation and growth.

8. Rate of Inflation
The relative price of food is computed
as the ratio of the WPI component for
primary food commodities to an index
of non-food manufacturing prices
computed from WPI data.

9. Why is Inflation a Problem in India?
Price Effects :
Inflation makes some people worse off, but it makes others better off
Ex: 1. Increase in Gasoline prices affect the Truck drivers more but barely affects people
who go to there work by walk and economy vehicles
2. College tuition fees has risen almost twice as fast as average prices over the past
10 years, which hurts you a lot,
but may have little impact on a married couple with no children.
3. Poultry diseases causes a rise in the prices of Non-veg food items and affect people
who eats more of Non- veg
food items but it barely affects people eating Veg food.
4. People in Cities get affected more than people in small towns and villages

10. Income Effects :
Prices for goods and services mean income for some people. So, as some prices
increase faster
than other, some people’s income increase faster than others.
Ex: 1.Due to increase in number of automobiles working on Gasoline increased,
due to this most of the Oil companies
record very high amounts of improvements in profits every year
2. Due to ever increasing in pollution, the number of people suffering from
different diseases also increased which gave
chance to many pharmaceutical companies to improve profits every year
3. All the retail stores working on % profit’s increase there income when ever
there is increase in prices of goods

11. Wealth Effects :
1. Inflation redistributes income between Borrowers and Lenders
2. Inflation benefits the borrowers and hurts the lenders
Reason: As the value of money decreases at higher rate

12. Inflation redistributes the social conditions of people
Causes of Inflation
Factors on Demand side :
1. Increase in Money Supply
2. Increase in Disposable Income
3. Deficit Financing
4. Foreign exchange reserves
Factors on Supply Side :
1. Rise in administered prices
2. Erratic agricultural growth
3. Agricultural price policy
4. Inadequate industrial growth
Printing Of Money
is never a
Solution for Inflation

13. Factors on Demand side
1. Increase in Money Supply
If the currency in circulation increased,
there would be a proportional increase
in the price of goods
2. Increase in Disposable Income
Disposable income is total personal income
minus personal current taxes. disposable
income is the amount of "play money“ left to
spend or save. If this is increased people
spend money on unnecessary things and
there demand increases and thus inflation
3. Deficit Financing
government spends more money than it
receives as revenue, the difference being
made up by borrowing or minting new
funds, minting new funds decrease the
value of money and thus inflation
4. Foreign Exchange Reserves
Foreign exchange reserves include
foreign currency deposits and bonds and
also adds gold reserves, which increase
the circulation of money and thus inflation

14. Factors on Supply Side
1. Rise in administered prices
Prices decided by an individual producer
or seller not purely by market forces, this
is common when there is only one
supplier and he has chance to increase
the cost with out any conditions
2. Erratic agricultural growth
India is country where in 60% of
people still relay on farming and
the weather is so uneven and
prices depend on the agricultural
productivity
3. Agricultural price policy
Due to fluctuating prices during mid 60’s
during the Pakistan war APP was
introduced to ensure stability in prices, so
when the supply decreases they have to
manage the prices in order to stabilize
the cost and inflation occurs
4. Inadequate industrial growth
Most of the markets in India run foreign
imported products due to lack of
technology and other issues, so the
pieces also keep fluctuating on the other
countries markets and market value and
too much imports can lead to fall of
value of money

15. Increase in Printed Money Increase in Disposable Income
Due to Increase in disposable
money people spend money
lavishly independent of there
necessity and thus there is
increase in Inflation
Mainly seen in IT
Sector in India due to
its speedy growth
Deficit Financing
This happens every year
in India and India has a debt
of 172 Billion Dollar up-to
now and still unable to repay
it to World bank
Foreign Exchange Reserves
Forex reserves increase every week
due to good participation of foreign
companies and latest reports from
RBI says 293 Billion Dollar
investment from Foreign companies
Factors on Demand side

16. Factors on Supply Side
Rise in administered prices
In case of India the administer can
be government or individual if it is
government then it is a fixed price if
it is on the individual then there is
lot more variations based on ones
decision costs are decided
Erratic agricultural growth
Vegetable Max
Cost/kg
Min
Cost/kg
Tomato 60 5
Potato 30 14
Onion 70 20
Cauliflower 45 20
Brinjal 45 20

17. Factors on Supply Side
Agricultural price policy
Though APP was successful for in some regions but due to poor
Infrastructure the food grains and vegetables stored always get
spoiled and due this the demand supply would decrease
Inadequate industrial growth
GDP growth
which clearly
depicts Industrial
Growth

18. They add inefficiencies in the market and make it difficult for companies to
budget or plan for long term
Uncertainty about the future purchasing power of money discourages
investments and savings
There can be negative impacts to trade from an increased instability in
currency exchange prices caused by unpredictable inflation
If the inflation rate in the economy of a country is higher than rates in
other economy’s there will be huge increase in imports and decrease
in exports (in terms of vaule) and hence huge fall in GDP
Higher income tax rate
Value of money decreases

19. Measures to control Inflation
1. Effective policies to control inflation need to focus on the underlying causes of
inflation in the economy
Ex: 1. If the main cause is excess demand for goods and services, then
government policy should look to reduce the level of aggregate demand
2. If cost-push inflation is the root cause, production costs need to be
controlled for the problem to be reduced
Step to be taken
Investment in infrastructure and human capital to ensure that desired growth
does not exceed the productive capacity of the economy.
2. If Inflation is for short period of time and If not Food Inflation
Step to be taken
In the short-run the RBI should raise interest rates sharply to protect
its anti-inflationary credibility.

20. 3. To eradicate Erratic agricultural growth problem
Step to be taken
Investment and promotion of organizational innovations in agriculture to ensure
that food supply does not become a bottleneck to growth and price to price (cost
effectively)
4. Demonetization Of Currency
Step to be taken
Primarily to curb unaccounted money. The higher denomination banknotes in
Rs.5000 and Rs.10000 were to reintroduced and these banknotes (Rs.5000 and
Rs.10000) were to be demonetized
5. A strong Fiscal Policy Reduction in unnecessary expenditure by the government
Step to be taken
Expenditures on public functions and rally's and public meeting, usage high
standards Infrastructure by public officials need to be decreased to certain
fixed level

21. 6. Check on the amount the government sector borrows each year
7. Moving towards greater independence for the central bank and transparency in
monetary policy to stabilise inflationary expectations.
8. Increase in Savings
What
happens
with fiscal
Policy
These fiscal policies increase the rate
of leakages from the circular flow and
reduce injections into the circular
flow of income and will reduce
demand pull inflation at the cost of
slower growth of economy
Policy recommended for short-run
Fiscal consolidation to ensure that fiscal policy does
not work at cross-purposes with monetary policy.
A loose fiscal policy, by increasing the debt burden
both directly and through its effect on interest rates,
would prove to be unsustainable in the long run
As the debt burden rises, the pressure to print
money to finance the fiscal deficit would rise,
thereby making it impossible to pursue an anti-inflationary
monetary policy.

22. Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as
a hit man.
Ronald Reagan