This document discusses various aspects of inflation including its characteristics, causes, types, and effects. It defines inflation as a sustained increase in the general price level in an economy. Inflation can be caused by an excess demand due to an increase in money income or a decrease in production. The types of inflation discussed include comprehensive vs sporadic inflation, wartime vs postwar inflation, and creeping vs walking/running/galloping inflation based on the rate of price increases. The document also examines why governments try to control inflation and outlines some effects of inflation on different sectors of the economy.

1. Business Environment
Chap 5: Inflation
Made By Rayyan

2. Characteristics or Features Of Inflation
Inflation involves a process of the
persistent rise in prices. It involves
rising trend in price level.
Inflation is a state of disequilibrium.
Inflation is scarcity oriented.
Inflation is dynamic in nature.
Inflationary price rise is persistent and
irreversible.

3. Characteristics or Features Of Inflation
Inflation is caused by excess demand
in relation to supply of all types of
goods and services.
Inflation is a purely monetary
phenomenon.
Inflation is a post full employment
phenomenon.
Inflation is a long-term process

4. Define Inflation?
Inflation is defined as a general rise in
prices of all commodities manufactured and
consumed within the territory of a nation
Inflation means a sustained increase in the
aggregate or general price level in an
economy. Inflation means there is an
increase in the cost of living.
“inflation means that your money won’t
buy as much today as you could yesterday ”

5. Why governments try to control
Inflation?
Inflation occurs due to an :-
1.imbalance between demand and
supply of money,
2.changes in production and
distribution cost or
3. increase in taxes on products.

6.  When economy experiences inflation, i.e. when
the price level of goods and services rises, the
value of currency reduces. This means now each
unit of currency buys fewer goods and services.
 It has its worst impact on consumers. High
prices of day-to-day goods make it difficult for
consumers to afford even the basic commodities
in life.
This leaves them with no choice but to ask for
higher incomes. Hence the government tries to
keep inflation under control.

7. Why is inflation good?
 Contrary to its negative effects, a
moderate level of inflation characterizes a
good economy.
 An inflation rate of 2 or 3% is beneficial for
an economy as it encourages people to buy
more and borrow more, because during
times of lower inflation, the level of
interest rate also remains low.
 Hence the government as well as the
central bank always strive to achieve a
limited level of inflation.

8. Terms Related to Inflation
 Deflation : Deflation is a condition of falling
prices. It is just the opposite of inflation. In
deflation, the value of money goes up and prices
fall down. Deflation brings a depression phase of
business in the economy.
 Statflation : The term 'Statflation' was coined
by Dr. P.R. Brahmananda to describe the
inflationary situation of India. According to
Brahmananda, Rising prices in the middle of a
recession is known as Statflation.

9. Effects of Inflation
 Inflation affects the different sectors of the
economy differently.
 In general, inflation seem to be negative.
 If the rate of inflation is low, then this provides
some motion to the economy. This sort of motion
increase the employment and leads the economy
towards development and prosperity.
 When the rate of inflation is high, then this will
affect the economy negatively. This will hinder
the capital formation as well as create the black
market and artificial scarcity with decrease in the
quantity of goods.

10.  If the income of people increases in proportion to
the increase in the price of goods, then this is not
regarded as harmful, but if the price and income
do not increase proportionately in the economy,
then this will affect different sectors of the
society differently.

11. Causes of Inflation
 Inflation in the economy will occur when
effective demand and production
cost increase excessively. In other words,
inflation will occur when there is an
excessive increase in effective demand and
production cost in the economy. that
is, disequilibrium created in the economy
when aggregate demand is excessively
higher than the aggregate supply is known
as inflation.

12.  The main cause for the increase in the
aggregate demand is the increase in
monetary income or increase in the
quantity of money. therefore, there are
mainly two causes for inflation, they are:
1. Increase in money income
2. Decrease in production

13. Increase in Money Income.
Demand for goods and services increase as monetary income
increases. but if production does not increase in proportion
with the increase in demand, then disequilibrium will be
creased. due to such disequilibrium, price of goods and
services will increase.
Main cause for the increase in money income are as follows:
(a)monetary and credit policy of government
monetary expansion will occur when the government
undertakes the policy of spending excessive quantity of
money. failure of proper control in such a situation will
create inflation. similarly, bank rate policy of the central
bank and open market operations will influence the
quantity of credit.

14.  Low interest rate will increase the demand
for credit resulting the increase in the
credit expansion. similarly. if securities sold
through the central bank in the open
market are purchased by the people then
quantity of money will increase in the
society. so, due to monetary policy of the
government and the central bank, the
credit as well as the income of the people
will increase. this will result disequilibrium
in production and income creating inflation
in the economy.

15. (b) deficit financing
The budget in which income is less than the
expenditure indicated in the public budget is known
as deficit budget. that is, if government
expenditure is more than income then to meet or
fulfill such expenditures the government will issue
excessive quantity of money through the central
bank. in such a situation, the government taken
loan from the central bank. thus taken loan when
spent in various sectors will increase the monetary
expansion. this will increase the money income of
the people and the situation of inflation will arise in
the economy.

16. (c) credit policy of commercial bank
if demand for credit increase excessively,
then only small part of the deposits
deposited by the deposits will be kept in the
cash-fund by the commercial banks. this will
increase the credit expansion of the
commercial banks excessively. due to
excessive increase in credit expansion, more
quantity of money will be in use in the
society. increase in the use of money in the
society will create the state of inflation.

17. Increase in Money Income
d) increase in the velocity of circulation of money
due to increase in the propensity to consume of
the people, the personal expenditure will
increase. as a result of this, the saving of the
people will decrease and the velocity of the
circulation of money will increase. due to
increase in the velocity of circulation of money,
the demand will increase and supply will
decrease.as a result, there will be an excessive
increase in the price of goods and services, and
inflation will be encouraged.

18. (e) financial mismanagement
due to failure of proper financial
management by the government, the tax
won't be collected properly, while sometimes
the government will reduce the tax for
various reasons. as a result of this, the
quantity of unaccounted money will increase
with the people and demand for goods and
services. the price of the goods and services
will also increase resulting inflation in the
economy.

19. (f) export promotion policy
Every developing country's trade will be in as
unbalanced state. to solve this problem the
government will undertake export promotion policy
and will discourage imports. for this , the
government will evaluated the domestic currency.
as a result of this domestic goods will be cheaper in
the international market of foreign countries, the
quantity of goods in the country will be less relative
to the demand for the goods. as a result of the
disequilibrium between demand and supply , the
price will increase creating inflation in the
economy.

20. (g) increase in unproductive expenditure
The excessive expenditure of the government
in various wars and internal defense or
construction of various infrastructures of
development such as health, education,
transportation, communication sectors etc.
will increase the money income of the public.
but the production of consumption goods of
the public will be less compared to the
increase in income. this will also increase
demand excessively and inflation will be
resulted.

21. Decrease in Production
Due to various reason the production in the country will decrease. as a
result of decrease in production. disequilibrium will be created between
demand, supply and inflation will be resulted. the causes for decrease in
production are as follows:
a) natural causes
nature calamities that occur at different times, such as , floods,
landslides, earthquakes, drought, etc. decrease agricultural
production. that is these natural calamities affect badly the countries
based on agriculture. in other words the countries whose economy is
dependent upon agriculture will be badly affected by the natural
calamities. along with the decrease in the agriculture product this will
also result in scarcity if raw materials required for the industries
required for the industries based on agriculture will increase. in such
a situation, despite the constant money income, due to natural
causes the production will decrease and inflation will be resulted.

22. (b) Law of diminishing returns
the returns of land are not always in proportion.
sometimes the law if increasing returns is
applicable and sometimes the law of diminishing
returns is applicable. if the law of diminishing
returns is applicable, then low production will
be resulted through high production cost. as a
result of high production cost the price of the
goods will increase and inflation will occur.
when production is less in proportion to
productions cost, inflation will be created.

23. (c) lack of raw materials
lack of raw materials required for production
will decrease the production. due to
decrease in production, disequilibrium will
emerge between demand and supply
resulting in the increase price of goods. this
will lead to inflation.

24. (d) techniques of production
the quantity of production is also
affected by the techniques of
production. if the production technique
is very old, then production will
decrease instead of increasing. if
modern and scientific methods of
production are not used, then
production will decrease with the
increase in price. this will lead to
inflation.

25. (e) trade and taxation policy of the government
if excessive tax is levied on the production of goods
by the government , then the price of the produced
goods will also increase. due to increase in price the
demand will decrease and this will result in the
decrease in production. in addition to this, if the
government undertakes the export promotion
policy and encourages export, then the quantity of
goods in the country will be less. that is , there will
be a shortage of goods in the domestic market. due
to this shortage the price of goods will increase.
thus, trade and taxation policy of the government
will also create the state of inflation.

26. (f) industrial disputation
due to various disputations in the
industrial sector of a country, such as,
strike by lab ours, conflict between
trade union and industrialist, instability
in the country, etc. will force the
industries and factories to be closed
down. closing down of factories and
industries will decrease the production
and increase the price. this increase in
price will create the state of inflation.

27. Decrease in Production
(g) structure of production
if disequilibrium arises in the structure of
production, then in such a situation also
inflation will occur. due to production of
other goods in greater quantity than the daily
consumption goods of the public the price of
the daily consumption goods will increase. so
, decrease in the production of consumption
goods will increase the price of such goods
leading the way to inflation.

28. (h) increase in population
If the population of a county increases
more rapidly than the increase in
production, then there will arise a state
of disequilibrium between demand and
supply. the demand will be more than
the supply and as a result the price will
increase which will be the cause of
inflation.

29. Types of Inflation on Coverage
Types of inflation on the basis of coverage and
scope point of view:
 Comprehensive Inflation : When the prices of all
commodities rise throughout the economy it is
known as Comprehensive Inflation. Another name
for comprehensive inflation is Economy
Wide Inflation.
 Sporadic Inflation : When prices of only few
commodities in few regions (areas) rise, it is
known as Sporadic Inflation. It is sectional in
nature. For example, rise in food prices due to
bad monsoon (winds bringing seasonal rains in
India).

30. Types of Inflation on Time of Occurrence
Types of inflation on the basis of time (period) of
occurrence:-
 War-Time Inflation : Inflation that takes place during the
period of a war-like situation is known as War-Time
inflation. During a war, scare productive resources are all
diverted and prioritized to produce military goods and
equipment's. This overall result in very limited supply or
extreme shortage (low availability) of resources (raw
materials) to produce essential commodities. Production
and supply of basic goods slow down and can no longer
meet the soaring demand from people. Consequently,
prices of essential goods keep on rising in the market
resulting in War-Time Inflation.

31.  Post-War Inflation : Inflation that takes
place soon after a war is known as Post-War
Inflation. After the war, government
controls are relaxed, resulting in a faster
hike in prices than what experienced during
the war.
 Peace-Time Inflation : When prices rise
during a normal period of peace, it is
known as Peace-Time Inflation. It is due to
huge government expenditure or spending
on capital projects of a long gestation
(development) period.

32. Types of Inflation on Government Reaction
Types of inflation on basis of Government's reaction or its
degree of control:-
 Open Inflation : When government does not attempt to
restrict inflation, it is known as Open Inflation. In a free
market economy, where prices are allowed to take its own
course, open inflation occurs.
 Suppressed Inflation : When government prevents price
rise through price controls, rationing, etc., it is known as
Suppressed Inflation. It is also referred
as Repressed Inflation. However, when government
controls are removed, Suppressed inflation becomes Open
Inflation. Suppressed Inflation leads to corruption, black
marketing, artificial scarcity, etc.

33. Types of Inflation on Rising Prices
 Creeping Inflation : When prices are gently
rising, it is referred as Creeping Inflation. It is
the mildest form of inflation and also known as
a Mild Inflation or Low Inflation. According
to R.P. Kent, when prices rise by not more than
(up to) 3% per annum (year), it is called
Creeping Inflation.

34.  Walking Inflation : When the rate of rising
prices is more than the Creeping Inflation,
it is known as Walking Inflation. When
prices rise by more than 3% but less than
10% per annum (i.e between 3% and 10%
per annum), it is called as Walking
Inflation. According to some economists,
walking inflation must be taken seriously as
it gives a cautionary signal for the
occurrence of Running inflation.
Furthermore, if walking inflation is not
checked in due time it can eventually
result in Galloping inflation.

35.  Chronic Inflation : If creeping inflation
persist (continues to increase) for a longer
period of time then it is often called as
Chronic or Secular Inflation. Chronic
Creeping Inflation can be either Continuous
(which remains consistent without any
downward movement) or Intermittent
(which occurs at regular intervals). It is
called chronic because if an inflation rate
continues to grow for a longer period
without any downturn, then it possibly
leads to Hyperinflation.

36.  Moderate Inflation : Prof. Samuelson
clubbed together concept of Creeping and
Walking inflation into Moderate Inflation.
When prices rise by less than 10% per
annum (single digit inflation rate), it is
known as Moderate Inflation. According to
Prof. Samuelson, it is a stable inflation and
not a serious economic problem.

37.  Running Inflation : A rapid acceleration in
the rate of rising prices is referred as
Running Inflation. When prices rise by more
than 10% per annum, running inflation
occurs. Though economists have not
suggested a fixed range for measuring
running inflation, we may consider price
rise between 10% to 20% per annum (double
digit inflation rate) as a running inflation.

38.  Galloping Inflation : According to Prof.
Samuelson, if prices rise by double or triple
digit inflation rates like 30% or 400% or
999% per annum, then the situation can be
termed as Galloping Inflation. When prices
rise by more than 20% but less than 1000%
per annum (i.e. between 20% to 1000% per
annum), galloping inflation occurs. It is also
referred as Jumping inflation. India has
been witnessing galloping inflation since
the second five year plan period.

39.  Hyperinflation : Hyperinflation refers to a
situation where the prices rise at an alarming high
rate. The prices rise so fast that it becomes very
difficult to measure its magnitude. However, in
quantitative terms, when prices rise above 1000%
per annum (quadruple or four digit inflation rate),
it is termed as Hyperinflation. During a worst case
scenario of hyperinflation, value of national
currency (money) of an affected country reduces
almost to zero. Paper money becomes worthless
and people start trading either in gold and silver
or sometimes even use the old barter system of
commerce.

40. Types of Inflation on Causes
 Deficit Inflation : Deficit inflation takes
place due to deficit financing.
 Credit Inflation : Credit inflation takes
place due to excessive bank credit or
money supply in the economy.
 Scarcity Inflation : Scarcity inflation occurs
due to hoarding. Hoarding is an excess
accumulation of basic commodities by
unscrupulous traders and black marketers.

41.  It is practiced to create an artificial
shortage of essential goods like food grains,
kerosene, etc. with an intension to sell
them only at higher prices to make huge
profits during scarcity inflation. Though
hoarding is an unfair trade practice and a
punishable criminal offence still some
crooked merchants often get themselves
engaged in it.
 Profit Inflation : When entrepreneurs are
interested in boosting their profit margins,
prices rise.

42.  Pricing Power Inflation : It is often referred
as Administered Price inflation. It occurs
when industries and business houses
increase the price of their goods and
services with an objective to boost their
profit margins. It does not occur during a
financial crisis and economic depression,
and is not seen when there is a downturn in
the economy. As Oligopolies have the ability
to set prices of their goods and services it
is also called as Oligopolistic Inflation.

43. Tax Inflation : Due to rise in indirect
taxes, sellers charge high price to the
consumers.
Wage Inflation : If the rise in wages in
not accompanied by a rise in output,
prices rise.

44.  Build-In Inflation : Vicious cycle of Build-in
inflation is induced by adaptive expectations of
workers or employees who try to keep their wages
or salaries high in anticipation of inflation.
Employers and Organizations raise the prices of
their respective goods and services in anticipation
of the workers or employees' demands. This
overall builds a vicious cycle of rising wages
followed by an increase in general prices of
commodities. This cycle, if continues, keeps on
accumulating inflation at each round turn and
thereby results into what is called as Build-in
inflation.

45. Types of Inflation on Causes
 Development Inflation : During the process
of development of economy, incomes
increases, causing an increase in demand
and rise in prices.
 Fiscal Inflation : It occurs due to excess
government expenditure or spending when
there is a budget deficit.
 Population Inflation : Prices rise due to a
rapid increase in population.

46.  Foreign Trade Induced Inflation : It is
divided into two categories, viz., (a)
Export-Boom Inflation, and (b) Import
Price-Hike Inflation.
 Export-Boom Inflation : Considerable
increase in exports may cause a shortage at
home (within exporting country) and results
in price rise (within exporting country).
This is known as Export-Boom Inflation.

47.  Import Price-Hike Inflation : If a country imports
goods from a foreign country, and the prices of
imported goods increases due to inflation abroad,
then the prices of domestic products using
imported goods also rises. This is known as Import
Price-Hike Inflation. For e.g. India imports oil
from Iran at $100 per barrel. Oil prices in the
international market suddenly increases to $150
per barrel. Now India to continue its oil imports
from Iran has to pay $50 more per barrel to get
the same amount of crude oil.

48.  When the imported expensive oil reaches India,
the indian consumers also have to pay more and
bear the economic burden. Manufacturing and
transportation costs also increase due to hike in
oil prices. This, consequently, results in a rise in
the prices of domestic goods being manufactured
and transported. It is the end-consumer in India,
who finally pays and experiences the ultimate
pinch of Import Price-Hike Inflation. If the oil
prices in the international market fall down then
the import price-hike inflation also slows down,
and vice-versa.

49. Types of Inflation on Causes
 Sectoral Inflation : It occurs when there is
a rise in the prices of goods and services
produced by certain sector of the
industries. For instance, if prices of crude
oil increases then it will also affect all
other sectors (like aviation, road
transportation, etc.) which are directly
related to the oil industry. For e.g. If oil
prices are hiked, air ticket fares and road
transportation cost will increase.

50. Demand-Pull Inflation : Inflation
which arises due to various factors like
rising income, exploding population,
etc., leads to aggregate demand and
exceeds aggregate supply, and tends to
raise prices of goods and services. This
is known as Demand-Pull or Excess
Demand Inflation.

51. Cost-Push Inflation : When prices rise
due to growing cost of production of
goods and services, it is known as
Cost-Push (Supply-side) Inflation. For
e.g. If wages of workers are raised
then the unit cost of production also
increases. As a result, the prices of
end-products or end-services being
produced and supplied are
consequently hiked.

52. Types of Inflation on Expectation
 Anticipated Inflation : If the rate of
inflation corresponds to what the majority
of people are expecting or predicting, then
is called Anticipated Inflation. It is also
referred as Expected Inflation.
 Unanticipated Inflation : If the rate of
inflation corresponds to what the majority
of people are not expecting or predicting,
then is called Unanticipated Inflation. It is
also referred as Unexpected Inflation.

53. Measures to Curb Inflation
Since inflation has negative effect in
the economy the government should
control it.
But control of inflation does not mean
that the price is kept constant totally.

54. Excessive inflation will have serious
social, political economic effects.
Therefore, for the equilibrium of the
economy, the inflation has to be
controlled.
To control the rate of inflation the
following measures can be undertaken:
1.monetary measures
2.fiscal measures
3.direct measures

55. Monetary Measures
The inflation in the economy can be controlled by
the monetary policy of the central bank. For the control
of inflation, the central bank will undertake the
following monetary measures:
(1) increase in bank rate- To control the inflation the
central bank will increase the bank rate. This will
increase the interest rate for the loan provided by the
bank. Thus, increased interest the will decrease the
demand for loans. In turn decreasing the monetary
expansion. This will control inflation to some extent.

56. (2) open market operation- For the control of
inflation the central bank sells the
government securities to the businessmen
and public through open market operation.
This will bring the money from the hands of
businessmen and public to the hands of
central bank. The quantity of money in the
hands of businessmen and public will
decrease and as a result inflation will be
controlled.

57. (3) increase in the minimum cash
reserve ratio CRR- Central bank will
increase the minimum cash reserve ratio
of the commercial banks. So,
commercial banks will have to deposit
more amount of cash in the central
bank. This will decrease the credit
creation capacity of the commercial
banks and as a result inflation will be
controlled.

58. (4) decrease in the credit facility- If
credit facilities and instalment facilities
are given for the durable goods, such as
televisions, cars, washing machines,
refrigerators, etc. then demand for such
goods will increase. To control inflation
in such a situation, the central bank will
increase the amount of first instalment.
This will decrease the demand for such
goods and as a result inflation will be
controlled.

59.  (5) changes in the margin requirement of
securities - When inflation occurs in a
country, then to control this the central
bank will arrange a system for commercial
banks to provide less amount of loan than
the value to the securities. As a result of
this , customers will get less amount of
loan for the higher value of securities. This
will decrease in the monetary-expansion
and inflation will be controlled.

60. Fiscal Measures
To control the inflation that occurs in the
economy, the government has to undertake
fiscal measures along with the monetary
measures.
Government can control inflation through
different types of fiscal policies which can be
explained as follows:

61. increase in the rate of taxation-
Government has to increase the tax
rate in various sectors of the economy.
This will decrease the quantity of
money in the hands of people of
different sectors and as a result
inflation will be controlled. In addition
to this due to new taxes demand for
goods will decrease and price increase
will be checked.

62. balanced budget- To control
inflation, the government has to
prepare balanced budget as far as
possible. This is because to fulfill
deficit budget the issuing of new
notes will be required. As the
issuing of new notes creases
inflation it is controlled by
preparing balanced budget.

63.  decrease in the government expenditure -
Increase in the public expenditure by the
government will increase the quantity of
money in the hands of the public. This will
increase in the demand for goods creating
the state of inflation. So, there should be
decrease in the government expenditure.
This will decrease the demand and inflation
will be controlled.

64.  encouragement to saving- Government has
to encourage saving and decrease
consumption through different fiscal
policies. This will decrease the demand and
inflation will be controlled.

65.  over valuation of money- In the time of inflation,
demand for goods will increase excessively. To
control this , the export of domestic goods to
foreign countries should be checked. For this, the
domestic currency should be over-valued. This
will make the domestic goods expensive in
the foreign markets. This will decrease the
demand for domestic goods by customers of the
foreign markets. That is, export from the
domestic country to the foreign countries will
decrease. As a result, domestic goods will be
available in the domestic market at lower price
and this will help in controlling inflation

66. Direct Measures
To control inflation, in addition to monetary
and fiscal policies the government can under
take some other types of direct measures on
inflation by determining an appropriate wage
rate. The wage of the labors should be
determined on the basis of their productivity.
This will also control inflation.

67.  (1) control of the wage rate
due to high wage rate demand increase in
the economy and as a result inflation will
occur. in such a situation, the government
can control inflating by determining an
appropriate wage rate. the wage of the lab
ours should be determined on the basis of
their productivity, this will also control
inflation.

68.  (2) increase in production
if production increase in the same
proportion as the increase in the quantity
of money, then inflation won't occur in the
economy. while increasing production, the
government should encourage the
production of necessity goods rather than
the production if luxury goods. this will
increase the production of necessary goods
as per demand and the inflation will be
controlled.

69.  (3) change in investment pattern
during the time of inflation, income
increase due to increase in the quantity of
investment. but production of directly
necessary goods won't increase. as a result
of this, inflation will occur. in such a
situation, the government should encourage
investment in the production if direct
consumption goods rather than in
the construction of infrastructures of
production.

70. (4) direct control
the government can control inflation
by the direct control over the increase
in price. in such a situation, the goods
whose demand is more than the
production, the government should
supply those goods under "rationing".
this will control the increase in
demand for such goods and inflation
will be controlled.