This document discusses two types of inflation: demand-pull inflation and cost-push inflation. Demand-pull inflation occurs when demand for goods and services exceeds limited supply, and is caused by factors like increased money supply and credit, public spending, taxes, and private expenditures. Cost-push inflation happens when aggregate demand exceeds aggregate supply due to rising production costs, such as increased wages, taxes, profits, and interest rates. The document also outlines methods for measuring inflation rates, such as the consumer price index and GDP deflator.

1. On the basis of causes
1. Demand pull inflation
2. Cost push inflation

2. Demand pull Inflation:
If the demand for goods and services excessive over
limited supply, then demand pull inflation occurs.
Main causes of demand pull inflation are as follows:
a. Increase in money supply & bank credit
b. Increase in public expenditure in productive purpose.
c. Reduction in taxes.
d. Increase in private expenditure.
e. Repayments of public debts.
f. Increase in foreign demand for domestic goods.
g. Increase in population.
h. Money earned by illegal activities.

3. Demand Pull Inflation
As
E4
E3
E2
E1
AD4
AD3
AD2
AD1
Q1 Q2 Q3
Y
P4
P3
P2
P1
O X
Price level
Output level

4. Cost push Inflation:
If aggregate demand exceeds over aggregate supply
due to cost raising factors such as increase in profit
margin and wage cost, supply shock etc. it is said to be
cost push inflation.
Main causes of cost push inflation are as follows:
a. Increase in wage rate.
b. Increase in indirect taxes.
c. Increase in profit margin (profit push inflation).
d. Reduction of subsidies.
e. Increase in interest rate.
f. Supply shock.
g. Devaluation of currency.

5. Cost Push Inflation
E1
E2
P2
P1
Q2 Q1
AD
As
Y
X
Price level
Output level

6. Measures of rate of inflation
 The inflation rate between two periods of time is
measured by the percentage increase in the relevant
price index from the first period to the second period.
 Let 푃푡−1 indicates the value of the price index in the first
period and 푃푡 is the value in the second period, then the
inflation rate can be measured as:
Rate of inflation (r) =
푃푡 − 푃푡−1
푃푡−1
× 100

7. Consumer price index (CPI):
 CPI measures the change in the general level of
price and they fail to reflect the effects of the
increase or decrease of price on the cost of living
of different class or group of people in a society.
The CPI can be computed in following two ways:
1. Aggregate expenditure method / Weighted
aggregate method:
2. Family budget method / Method of weighted
relative:

8. 1. Aggregate expenditure method / Weighted aggregate
method:
It can be calculated as
CPI =
푝1푞0
푝0푞0
× 100
where,
0 = Base year
1 = current year

9. 2. Family budget method / Method of weighted
relative:
It can be calculated as
CPI =
푝1푞0
푝0푞0

10.  The GDP deflator measures the relative change in the
current level of price in comparison to the level of price
in the base year.
 In other words, the GDP tells us the increase in nominal
GDP i.e. attributable to as increase price rather than an
increase in quantity produced.
GDP Deflator can be calculated as
GDP Deflator =
푁표푚푖푛푎푙 퐺퐷푃
푅푒푎푙 퐺퐷푃
× 100
GDP Deflator: