The document provides a comprehensive overview of inflation, defining it as the general increase in prices leading to decreased purchasing power. It discusses various types of inflation, including demand-pull, cost-push, and built-in inflation, as well as their causes and effects on the economy. Additionally, it describes deflation, inflationary and deflationary gaps, and proposes methods for mitigating these economic conditions.

1. INFLATION
By
Monojit Gope
Research Scholar

2. DEFINITION OF INFLATION
In economics, inflation is a general increase in prices and a decline in
the purchasing power of money. When the general price level rises,
each unit of currency buys fewer goods and services. Consequently,
inflation corresponds to a reduction in the purchasing power of money
and represents a loss of real income.
The opposite of inflation is deflation, a decrease in the general price
level of goods and services. Deflation occurs when the inflation rate
falls below 0%.

3. TYPES OF INFLATION
• There are three main types of inflation:
Demand-pull inflation.
Cost-push inflation, and
Built-in inflation.

4. DEMAND-PULL INFLATION
Demand-pull inflation occurs when there is too much money chasing too
few goods and services. This can happen when the government prints too
much money, or when people borrow too much money and spend it on
goods and services. When demand is greater than supply, businesses can
raise prices without losing sales.

5. COST-PUSH INFLATION
Cost-push inflation occurs when the cost of producing goods and
services rises. This can happen when the price of raw materials,
labor, or energy goes up. When the cost of production goes up,
businesses must raise prices in order to maintain their profit
margins.

6. BUILT-IN INFLATION
Built-in inflation occurs when workers and businesses expect
prices to rise in the future. When this happens, workers demand
higher wages to keep up with the rising cost of living, and
businesses raise prices to cover their increased costs. This can
create a vicious cycle, where inflation feeds on itself.

7. CAUSES OF INFLATION
• There are many causes of inflation, including:
Increase in the money supply: When the government prints more money, it increases the supply of money in the
economy. This can lead to inflation, as people are willing to pay more for goods and services when there is more
money available.
Increase in aggregate demand: When aggregate demand (AD) increases, it can lead to inflation. AD is the total
demand for goods and services in an economy. When AD increases, it means that people are buying more goods and
services. This can lead to higher prices, as businesses raise prices to meet the increased demand.
Decrease in aggregate supply: When aggregate supply (AS) decreases, it can lead to inflation. AS is the total supply
of goods and services in an economy. When AS decreases, it means that businesses are producing less goods and
services. This can lead to higher prices, as businesses are able to charge more for the goods and services that they do
produce.

8. EFFECTS OF INFLATION
• Inflation can have a number of negative effects on an economy, including:
Reduced purchasing power: When prices rise, the purchasing power of money falls. This
means that people can buy less with the same amount of money.
Increased uncertainty: Inflation can lead to increased uncertainty in the economy. This can
make it difficult for businesses to plan for the future and can lead to decreased investment.
Reduced economic growth: Inflation can lead to reduced economic growth. This is because
inflation can discourage investment and consumption, which are two of the key drivers of
economic growth.

9. DEFLATION
Deflation is a decrease in the general price level of goods and
services. Deflation occurs when the inflation rate falls below 0%.
Inflation reduces the value of currency over time, but sudden
deflation increases it. This allows more goods and services to be
bought than before with the same amount of currency. Deflation is
distinct from disinflation, a slow-down in the inflation rate, i.e.
when inflation declines to a lower rate but is still positive.

10. DISINFLATION
Disinflation refers to a decrease in the rate of inflation or
a period of slowing price increases. It is a term used to
describe a situation where the overall level of prices is still
rising, but at a slower pace compared to previous periods.
Disinflation is different from deflation, as deflation refers
to a sustained decrease in the general price level.

11. INFLATIONARY GAP
The inflationary gap refers to a situation in an economy where
the actual level of aggregate demand exceeds the economy's
potential output or the level of output that can be sustained in the
long run without causing inflationary pressures. It represents the
difference between the actual level of output and the economy's
full-employment or potential level of output.

12. CAUSES OF INFLATIONARY GAP
• Here are some pointers on the causes of inflationary gap:
Increase in government spending: When the government increases its spending, it injects more money into the
economy. This can lead to an increase in aggregate demand, which can cause inflation.
Increase in the money supply: When the central bank increases the money supply, it also increases the amount of
money available in the economy. This can lead to an increase in aggregate demand, which can cause inflation.
Increase in aggregate demand: When there is an increase in aggregate demand, it means that there is more demand
for goods and services than there is available supply. This can lead to inflation, as businesses will need to raise prices
in order to meet the increased demand.
Decrease in aggregate supply: When there is a decrease in aggregate supply, it means that there is less supply of
goods and services available in the economy. This can also lead to inflation, as businesses will need to raise prices in
order to cover their costs.

13. WAYS TO REDUCE AN INFLATIONARY GAP
• There are a number of ways to reduce an inflationary gap. These include:
Fiscal policy: The government can use fiscal policy to reduce aggregate demand. This can be
done by reducing government spending, increasing taxes, or a combination of both.
Monetary policy: The central bank can use monetary policy to reduce aggregate demand. This
can be done by raising interest rates, which makes it more expensive for businesses and
consumers to borrow money.
Supply-side policies: The government can also use supply-side policies to reduce inflationary
pressures. This can be done by reducing regulations, which can make it easier for businesses to
produce goods and services.

14. DEFLATIONARY GAP
A deflationary gap is an economic condition in which the
aggregate demand in an economy is insufficient to
produce full employment output. This means that the
economy is producing less than it is capable of producing,
and as a result, there is unemployment and
underutilization of resources.

15. CAUSES OF DEFLATIONARY GAP
• A deflationary gap can be caused by a number of factors, including:
A decrease in aggregate demand, such as when consumers and businesses
become more cautious about spending money.
An increase in aggregate supply, such as when there is a sudden increase in
productivity.
A decrease in the price level, which can lead to consumers and businesses
postponing purchases in anticipation of even lower prices in the future.

16. CONSEQUENCES OF DEFLATIONARY GAP
• A deflationary gap can have a number of negative consequences,
including:
Increased unemployment.
Decreased economic growth.
Increased poverty.
A decrease in the value of assets, such as houses and businesses.

17. WAYS TO REDUCE DEFLATIONARY GAP
• There are a number of ways to reduce a deflationary gap, including:
Fiscal policy: The government can increase spending or cut taxes to stimulate aggregate
demand.
Monetary policy: The central bank can lower interest rates to make it cheaper for businesses
and consumers to borrow money, which can lead to increased spending.
Supply-side policies: The government can invest in infrastructure, education, and research and
development to increase aggregate supply.
• Deflationary gaps can be difficult to correct, but it is important to do so in order to prevent the
negative consequences that they can cause.

18. CORE INFLATION
Core inflation is a measure of inflation that excludes food and
energy prices. These prices are excluded because they can be
volatile, meaning that they can change significantly in a short
period of time. This can make it difficult to track the underlying
trend of inflation. By excluding food and energy prices, core
inflation provides a more stable measure of inflation that can be
used to make economic decisions.

19. FORMULA FOR CORE INFLATION
• The formula for core inflation is:
Core inflation = (CPI - food and energy), where:
CPI is the Consumer Price Index, which measures the change in prices of a
basket of goods and services purchased by consumers.
Food and energy are two of the most volatile components of the CPI, so
excluding them can give a more accurate picture of underlying inflation
trends.

20. BENEFITS OF USING CORE INFLATION
• Here are some of the benefits of using core inflation:
It is less volatile than headline inflation, which makes it a more reliable
indicator of underlying inflation trends.
It is not as sensitive to changes in supply and demand for food and energy,
which can be caused by factors such as weather or political events.
It can be used to target monetary policy more effectively.

21. DRAWBACKS TO USING CORE INFLATION
• However, there are also some drawbacks to using core inflation:
It does not include two of the most important components of the CPI, food
and energy.
It can be difficult to define what should be included in the core inflation
basket.
It can be misleading if food and energy prices are rising for reasons other
than inflation, such as a drought or a war.

22. STAGFLATION
Stagflation is a situation in which the inflation rate is high or increasing, the
economic growth rate slows, and unemployment remains steadily high. It
presents a dilemma for economic policy, since actions intended to lower inflation
may exacerbate unemployment.
The term, a portmanteau of stagnation and inflation, is generally attributed to
Iain Macleod, a British Conservative Party politician who became Chancellor of
the Exchequer in 1970. Macleod used the word in a 1965 speech to Parliament
during a period of simultaneously high inflation and unemployment in the United
Kingdom.

23. HEADLINE INFLATION
Headline inflation refers to the overall rate of inflation that is
reported in the news and commonly observed by the general public. It
represents the change in the average price level of goods and services
in an economy over a specified period, typically measured by an index
such as the Consumer Price Index (CPI) or the Producer Price Index
(PPI). Headline inflation includes all components of the price index,
including both volatile and non-volatile items.

24. CONCLUSION
Inflation is a complex issue with a number of causes and consequences.
There is no single "best" way to reduce inflation, and the best approach will
vary depending on the specific circumstances of the economy. However,
policymakers have a number of tools at their disposal, including fiscal
policy, monetary policy, and supply-side policies. By using these tools
effectively, policymakers can help to keep inflation under control and
promote economic growth.

25. THANK YOU