Categorization of inflation,types of inflation measures to control inflation

1. INFLATION
BY
Dr.S.SUBBALAKSHMI,MA,Mphil,phd
Chair business & economics
FBS business School
Vijayawada & Bangalore

2. INFLATION
• What is inflation?: “Too much money chasing too few
goods .” –COULBORN.
• “Inflation denotes a rise in general level of prices” –
SAMUELSON.
• Inflation exists when money income is expanding more
than in proportion to increase in economic activity –
A.C PIGOU.
• Thus inflation can be defined as a persistent
• increase in general price level or a persistent
• decline in real income of people i.e decline
• in value of money. Present rate of inflation= 3.36%

3. Categorization of inflation
• Price Inflation : Inflation usually refers to
price inflation . Price inflation is an increase
in the prices of a basket of goods/services.
• Money Inflation : Is a sustained increase in
the money supply of a country. It causes price
inflation .
How money circulation increases ?
1) Direct cause is printing of additional
currency on demand of the government to

4. Continued….
meet it’s demand of expenditure.
2) Money supply is increased to pay the loans to
the world institutions like World Bank.These are
called deficit financing.
3) Money supply is also increased in the form of
capital by way of Foreign Direct Investments and
Foreign Institutional investment.
4) Tourism and other services provided by our
NRIs.

5. Types of Inflation
• Demand pull inflation: When more money
chases relatively less quantity of goods and
services, the excess demand relative to
supply, pushes up the prices of goods and
services. Such inflation as a result of
increased expenditure is called demand pull
inflation.

6. Continued…..
• Cost push Inflation :Situation where prices
persistently rise because of growing factor
costs. A rise in factor prices leads to a rise in
the total cost of production, consequently a
rise in the price level. The cost push once sets
in one industry spreads through out the
economy.

7. Continued….
• Example : A rise in the wages in the steel
industry prices of steel will rise rise in
the prices of vehicles, machines using steel
as input a rise in transportation cost and
manufactured goods .
• Agricultural prices will increase due to rise in
agricultural machinery. Leads to increase
in food and raw material prices leading to
increase in general price level.

8. Measurement of Inflation
• Who measures Inflation ?
• Central Statistical Organization

9. MEASUREMENT OF INFLATION
• Whole sale price index ( WPI ): is the prices of
representative basket of wholesale goods .
Updated on monthly basis. It includes the
entire set of commodities of 676 items which
carry different weights. `WPI is headline
inflation different from core inflation which
avoids prices of commodities that are volatile
in nature such as food & fuel.WPI series with
base 2004-2005 is being used to assess price
changes.

10. MEASUREMENT OF INFLATION
• Whole sale price index ( WPI ): is the prices of
representative basket of wholesale goods .
Updated on monthly basis. It includes the
entire set of commodities of 676 items which
carry different weights. `WPI is headline
inflation different from core inflation which
avoids prices of commodities that are volatile
in nature such as food & fuel.WPI series with
base 2004-2005 is being used to assess price
changes.

11. Continued….
• Consumer price Index : ( CPI ) CPI measures changes
in the price level of consumer goods
and services purchased by households. It reflects the
cost of living for the homogeneous group of
consumers. There are 4 CPI indices in India. These are
CPI for industrial workers, CPI for agriculture labor,
CPI for rural labor, and CPI for urban non manual
employees.CPI shows the real inflationary pressure
on consumers. In India, inflation was measured by
WPI. But now new CPI(combined) is declared as the
new standard of measuring inflation (April 2014 ).

12. Causes of Inflation
In general price rise will take place as a result of
rise in aggregate demand, or a failure of
aggregate supply.
1) Increase in public expenditure: Public
expenditure is increased from 18.6%( in 1961 )
of GDP to 28%( in 2012-13).
• Non developmental expenditure to the extent
of 40% ( defence,Police,Inetrest payments, Tax
collection charges.)

13. Continued….
• These will increase demand for goods but
nothing is done for increasing supply of goods
2).Deficit Financing :It is financing of budget
shortages by borrowing from banks and
printing of more money. Developmental
expenditure is frequently met by deficit
financing. But slow growth of projects turns in
to inflation

14. Continued….
3) Erratic Agricultural Growth : Indian agriculture
largely depends on the vagaries of monsoons.
This usually leads to scarcity of food grains due to
drought which in turn leads to food inflation.
4) Agricultural pricing policy: Support prices
announced for the farmers by the government to
ensure minimum prices may be helpful to the
farmers but they are major contributory factor to
the rise in prices.

15. Continued….
5) Inadequate rise in industrial production : As on
March 21st 2017, the contribution of industrial
sector is 29.02% while service sector is
contributing 53.66%.The fear in general is if
service sector bypasses the industrial sector
economic growth may be distorted and inflation
may set in . The growth in industrial sector in
between 1965 to 1985 is disappointing at a rate
of 4.7% per annum . In 2012 -14 the average
growth rate is less than 1% per annum .

16. Continued….
6) Upward revision of administered prices : Price
level is administered by government for some
important goods produced by public sector. This
is to cover the PSUs which are inefficient. This will
cause cost push inflation.
7) Other factors :Large scale tax evasion, black
marketing , hoarding, increase in population, high
capital-output ratio , infrastrural bottlenecks,
shortage of essential raw materials may lead to
inflation.

17. Measures to check inflation
• Monetary measures : Quantitative measures/
• General Measures :
• 1) Bank Rate, (7.75%) 2) Open market
• Operations 3 ) Variable reserve ratio( 4%)
Statutory reserve ratio( 20% ) Repo rate
• (6% ) 6) Reverse Repo Rate( 5.75%)
• As on 19th May 2017
• Refer Business cycles PPt for the operation of
above measures.

18. Monetary Measures
• Qualitative/Selective Measures :
1. Increasing margin requirements
2. Consumer credit regulation on durable consumer
goods.
3. Issues of directives to commercial banks to curb
individual credit structure.
4. Rationing of credit based on the purpose.
5. Moral suasion to commercial banks.
6. Direct action on commercial banks

19. Impact of Inflation/Effects of inflation
• On Consumers: The propensity to consume
reduces . An individual taking a home loan
worth of Rs 30 lakhs to buy a house ,and if
the price of house increases by 15% on
account of increase in prices of iron and steel,
the individual has to arrange for another Rs
4.5 lakhs , he has to re arrange his budget or
else he has to go for a smaller house. Similarly
changes in consumer prices upset consumer’s
daily budget.

20. Impact on producers ( Suppliers)
• Producers are affected in two ways. When
they are sellers they gain by higher prices thus
by higher profits.(if they are sellers of final
goods )
• They lose as buyers of technology, raw
materials , and factors of production . This will
lead to cost push inflation.

21. Impact on debtors and creditors
• On Debtors : Debtors borrow from creditors to
pay it later at a future date . The debtors pay
back less in real terms than what they have
borrowed . Thus to that extent they are
gainers.
• On Creditors : The creditors get less in terms
of goods and services than what they had lent
and stand to lose to that extent .

22. On Wage earners and fixed income
groups
• On wage earners :If there are rigid labor markets with
strong trade unions the wage earners may benefit, but
on the other hand with flexible labor markets and
unemployment in the economy ,the laborers are hard
hit by rising prices.
• On Fixed income group : The recipients of transfer
payments such as pensions social security benefits and
old age pensions, recipients of interest and rent,
holders of fixed interest bearing securities , debentures
and depositers will lose as the value of money
continues to fall with rising prices.

23. On equity holders and agriculturists
• On Equity holders :Persons who hold equity shares and
stocks gain . As the prices of goods increase company’s
profit margins increases and dividends on equities rise
more than the rise in prices.
• On Agriculturists : Among 3 kind of agriculturists,
absentee land lords lose as they get fixed rents . Owner
cultivators gain as prices of farm products rise more
than the rise in the input costs . Peasants who are the
agricultural labor are hit hard by the rise in prices of
consumer goods . Their wages wont rise at all as they
fall under un organized labor force.

24. Measurement of Inflation
• Through the Whole sale Price Index :
• This is by computing change in the Price Index
Numbers :
• Rate of Inflation: 100
• What is Price Index ?
• A price index is a numerical measure designed to
help to compare how the prices of a basket of goods
differ between time periods or geographical
locations
PIN t – PIN t-1 x
PINt-1

25. Numerical Example
• WPI in 1999-2000 = 150.9
• WPI in 2000- 01 =159.2
• The rate of inflation between the above
mentioned period =159.2 -150.9 /150.9 x 100
• = 5.5 %

26. GNP Deflator
• GNP Deflator is the ratio of GNP at current
prices to GNP at constant prices that is real
GNP.It shows by how much the prices have
increased or decreased.
• Numerical Example: India’s GNP at current
prices ( 1999-2000 )= 1740.2 thousand crores
• India’s GNP at constant prices= 1136.9
thousand crores.(1993-94 )
• GNP Deflator (1999-2000 ) =1740.2 /1136.9
• =1.53

27. • THANK-YOU