This document discusses inflation control. It begins by introducing inflation and how it is measured, primarily through the Consumer Price Index and Wholesale Price Index. It then covers the main causes of inflation, including demand-pull, cost-push, wage-push, and currency depreciation. The document outlines several measures to control inflation, such as monetary policies like adjusting bank rates, cash reserve ratios, and open market operations. Fiscal policies for controlling inflation include managing government spending, taxation, and public borrowing. The document also provides a case study on hyperinflation in Zimbabwe and policies pursued in India to maintain inflation between 2-6%. It concludes that reasonable inflation of 3-6% is ideal for economic growth while higher rates

1. Inflation Control

2. Contents
▪ Introduction to Inflation
▪ Inflation Measurement
▪ Causes of Inflation
▪ Types of Inflation
▪ Measures to Control Inflation
▪ Case Study
▪ Conclusion
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3. Introduction to Inflation
▪ Inflation is a sustained increase in the general price level
of the goods and services in an economy over a period of
time.
▪ Inflation in economy does not corresponds to price
increase of just one or two items, but actually it depends
on a large no. of goods and services on an average basis.
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4. Introduction to Inflation (Cont…)
▪ Inflation reduces the purchasing power of a currency,
decreases the time value of money.
▪ If an employee’s wages remains constant, but cost of
goods increases, then the employee can afford less.
▪ Inflation has a strong relation with the growth of an
economy and unemployment level in that country
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5. Measurement of Inflation
1. Consumer Price Index (CPI)
• CPI is a price index which represents the average price of a basket of
goods over time.
• It calculates the average price paid by the consumer to the shopkeepers.
2. Wholesale Price Index (WPI)
• WPI is an indicator of price changes in the wholesale market.
• It calculates the price paid by manufacturers and wholesalers in the
market. 5

6. Measurement of Inflation (Cont…)
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7. Measurement of Inflation (Cont…)
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8. Measurement of Inflation (Cont…)
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9. Causes of Inflation
1. Demand Pull Inflation
• Excess aggregate demand in the overall
economy
• Business respond to high demand by raising
prices to increase profit margin.
• The economy will be growing at a rate faster
than the long-run trend rate. 9

10. Causes of Inflation (Cont…)
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11. Causes of Inflation
2. Cost Push Inflation
• Overall prices increase (inflation) due to increases in the cost of
wages and raw materials.
• It occur when higher costs of production decrease the aggregate
supply (the amount of total production) in the economy.
• Since the demand for goods hasn't changed, the price increases
from production are passed onto consumers creating cost-push
inflation.
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12. Causes of Inflation (Cont…)
3. Wage Push Inflation
• Wage push inflation is an overall rise in the cost of goods
that results from a rise in wages.
• The federal and state governments have the power to
increase the minimum wage.
• For compensating those increased salaries, company
increases price level of their products.
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13. Causes of Inflation (Cont…)
4. Currency Depreciation
• Devaluation is likely to contribute to inflationary
pressures because of higher import prices and rising
demand for exports.
• Exports are cheaper to foreign customers
• Imports more expensive.
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14. Types of Inflation
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15. Types of Inflation

16. The basic causes of the Inflation are
1. Excess money supply in an
Economy
2. Excess purchasing power in the
hands of public.
So it is more important to deal with
these factors to bring inflation in
control.
Measures to Control Inflation
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17. Monetary Measures
To control the Money Supply
 Bank Rate Policy or Credit Control
 Cash Reserve Ratio
 Open Market Operation
 Maintaining Gold Standard
 Fixed Exchange Rates

18. Bank Rate Policy
▪ Bank rate-Interest rate at which RBI lends money to the domestic banks
▪ Increase in bank rates leads to – Increaseindepositrate
- Increaseinlendingrate
▪ Discourages businessmen and consumers to take loans
▪ Hence the controlled supply of money reduces the inflationary pressure
on the economy

19. Open Market Operations
▪ Sales and purchase of government securities and bonds by the central
bank.
▪ Gov. securities- Bonds & Debentures with certain maturity period are
issued by a government to raise the fund necessary to pay for its
expenses.
▪ Sale of the securities in the open market helps to regulate the
inflation.

20. Cash Reserve Ratio
▪ Banks are required to hold a certain proportion of the deposit in the
form of cash.
▪ Higher the Cash Reserve Ratio=> Lower the amount for lending and
investments with the banks.
▪ Tool for the RBI to control the amount that banks lent
i.e. to control the liquidity in the banking system and the country.

21. Maintaining Gold Standard & Fixed Exchange Rates
▪ Fix the prices of their domestic currencies in terms of a specified amount
of gold.
▪ National money and other forms of money (bank deposits and notes)
were freely converted into gold at the fixed price.
▪ A country's exchange rate regime under which the government or
central bank ties the official exchange rate to another country's currency
 Because exchange rates were fixed, the gold standard caused price levels
around the world to move together.

22. Fiscal Measures
▪ Government Expenditure- Govt. has to reduce their expenditure and
increase their savings to control the supply of money
▪ Taxation-Increasing some tax rates and imposing some new taxes
▪ Public Borrowings - the objective is to take away from the public excess
purchasing power. Public borrowing may be voluntary or compulsory.
▪ Debt Management -Stop the repayment of public debt to control the
inflationary pressure
▪ Adopt surplus budget

23. Fiscal Measures (cont…)
 Over-valuation-To control the over valuation of money it is essential to encourage
imports and discourage exports
Overvaluation of domestic currency in terms of foreign currencies will serve as an anti-
inflationary measure as
(i) it will discourage exports and thereby result in an increased availability of good and
services at home
(ii) encourage imports – add to domestic stock of goods and services,
(iii) by lowering the price of foreign inputs, it will help in checking the upward cost-
price spiral.

24. Other Measures
▪ Expansion of Output
• This lowers the excess demand of a commodity and lowers its price.
▪ Rational Wage Policy
• Wages should be allowed to rise only if there is an increase in the
productivity
• In such a situation, higher wages will not give rise to higher costs and
hence to higher prices

25. Other Measures(Cont…)
▪ Price Control & Rationing
• The objective of price control is to lay down the upper
limit beyond which, the price of a particular commodity
will not be allowed to rise.
• Demand can also be controlled through rationing of
essential commodities

26. Zimbawe Crisis
Hyperinflation

27. Hyperinflation:
▪ Hyperinflation is the rapid,excessive and uncontrolled increase in the
prices of goods and services.
▪ Very high and accelerated accelerating inflation.
▪ Prices of the goods and services is increased by 50% per month.
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28. Facts to back Hyperinflation in Zimbawe:
▪ Highest monthly Inflation rate: 79,600,000,000%
▪ Highest currency domination: 100 trillion
▪ Time to take prices to be doubled: 24.7 Hrs
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100 Trillion Dollars Note

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31. Causes :
▪ In the late 1990s, the Zimbabwe government introduced a series of land reforms. This
involved redistributing land from the existing white farmers to black farmers. But, with
little experience, the new farmers struggled to produce food, and there was a large fall
in food production.
▪ The economy experienced a sharp fall in output (both agricultural and manufacturing).
▪ With the economy in decline, government debt increased
▪ The economy also experienced many shortages of goods.
▪ National debt increased.
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The Government response to all these causes was to print money.
Due to decline in the output, there is a shortage of the supply of goods,
which pushes price up.
Demand was rising because people had more paper money.
This combination of more money chasing the fewer goods caused to
Increase the price rapidly.
AND THIS LEADS TO INFLATION!

33. Effects of Inflation :
▪ Severe unemployment.
▪ Food Crisis.
▪ People displacement.
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34. Steps taken to reduce Inflation :
▪ Zimbabwe adopted some foreign currency as official.
▪ In 2009, the government abandoned printing Zimbabwean dollars at all.
▪ In 2014, the Reserve Bank of Zimbabwe unveiled "convertible" coins in denominations
of US$0.01 through US$0.50. The Bank said that 80% of Zimbabweans use the U.S.
dollar, and said the local lack of coins induces retailers to round prices up to the next
higher dollar.
▪ The July 2018 inflation rate in Zimbabwe was officially 4.3%.
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35. Policy in India regarding Inflation :
▪ From 1969 until 2012, India Inflation Rate averaged 7.75 percent reaching an all time
high of 34.68 Percent in September of 1974 and a record low of -11.31 Percent in May of
1976.
▪ In 2016, the Reserve Bank of India (RBI) signed an agreement with
the Indian government that led to the creation of the first-ever monetary policy
committee (MPC) in the country.
▪ The Goals were: to ensure inflation stayed in the 2-6% range over the next five years,
with the target set at the midpoint, 4%.
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36. Policy in India regarding Inflation :
▪ The State and Central Government has different policies to tackle the inflation.
▪ The impact of inflation on rural and urban areas differs because of the diverse
consumption pattern and income distribution.
▪ The steps generally taken by the RBI to tackle inflation include a rise in repo rates (the
rates at which banks borrow from the RBI), a rise in Cash Reserve Ratio and a
reduction in rate of interest on cash deposited by banks with RBI.
▪ The government takes some protectionist measures (such as banning the export of
essential items such as pulses, cereals and oils to support the domestic
consumption, encourage imports by lowering duties on import items etc.).
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37. Conclusion :
▪ At the time of inflation the prices of commodities increases which reduce the
purchasing power of the consumers, and consumers have to reduce the
consumption.
▪ Inflation impacts the multiple sectors of the economy:
Distribution of income of wealth
Political Environment
Monetary Policy
Production
Unemployment
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38. Conclusion :
▪ A reasonable rate of inflation of around 3- 6 per cent is often viewed to have positive
effects on the national economy as it encourages investment and production and
allows growth in wages.
▪ When inflation crosses reasonable limits, it has negative effects. It reduces the value
of money, resulting in uncertainty of the value of gains and losses of borrowers,
lenders, and buyers and sellers.
▪ it also makes the poor worse off and widens the gap between the rich and the poor.
▪ If much of the inflation comes from increase in food prices, it hurts poor more since
over half of family budget of the low wage earners goes for food.
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