Types of Inflation and Deflation Measures to control Inflation and Deflation

2. PRESENTED BY:
1. PRATEEK GUPTA
2. SAMARTH ROY
3. SHUBHAM DHANGAR
4. SUJAY KUMAR
PRESENTED TO
CFA MONOJ SHARMA

3. 
Inflation

Types of inflation

Measures to control inflation

Deflation

Types of deflation

Measures to control deflation
CONTENTS

4. Inflation

5. An increase in the general level of prices in
an economy that is sustained over a period
of time is called inflation.
inflation
5

6. Inflation Rate
14
12.11
12
11.09
10.83
10
8.87
8.32
9.3
8
5.79
6
4.02
4
3.77
4.31
3.81 3.77
6.39
4.25
2
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
6
2013

7. 7

8. TYPES OF INFLATION
1. Demand-Pull Inflation
Types of Inflation
2. Cost-Push Inflation
3. Structural Inflation
8

9. DEMAND PULL INFLATION

Demand Pull Inflation represents a situation, wherein the aggregate
demand outweighs the aggregate supply.
Demand pull inflation

This increase in demand can be from the government, entrepreneurs, or
the households.

The demand is such that it can’t be met by the currently available supply
of output.

Thus, when pressure of aggregate demand for goods and services
exceeds the available supply of output, it naturally leads to rise in
price, i.e. Inflation.
9

10. The AS curve rises
but when full
employment level is
reached it takes a
vertical shape
becoming perfectly
inelastic.
This is because after
the level of full
employment, supply
of output can’t be
increased.
Source:http://www.bized.co.uk/virtual/economy/library/glossary/glossarydf.
htm
10

11. COST PUSH INFLATION

Without any increase in aggregate demand, inflation can still arise.

This may happen if there is increase in cost independent of any
increase in aggregate demand.
Cost push inflation

Such an inflationary situation is known as Cost-Push inflation.

Three increases in cost which generate cost push inflation are

Wage Push Inflation

Profit Push Inflation

Increase in prices of raw materials
11

12. • Increase in
wage, profit, prices of
raw materials lead to a
rise in cost of
production.
• Therefore, a leftward
shift can be seen in AS
• AD being
constant, there is a rise
in price.
12

13. WAGE PUSH INFLATION

Growth of powerful trade unions can be one of the reason for the spread
and rise of inflation.
Wage push Inflation

This arises when trade union push for which are not justifiable either on
grounds of prior rise in productivity or on grounds of a cost of living, thus
producing a cost-push effect.

The employers agree to these wage claims because they hope to pass
on these rises in the cost to the consumer in the form of hike in prices.
13

14. PROFIT PUSH INFLATION

Increase in the profit margin by the firms working under monopolistic or
oligopolistic conditions.
Profit push Inflation

This leads to charging higher prices from the consumer.
 is called profit push inflation because the cause of cost-push is profit.
It

This also results in the shift in supply curve towards the left.
14

15. INCREASE IN PRICE OF RAW MATERIALS
 addition to a rise in wage rate and increase in profit margins, a rise in
In
price of raw materials leading to rise in price of cost of production also
plays a part in creating a cost-push situation.
Increase in price of raw
materials
 cost of production increases then the producers will obviously hike the
If
prices of their product in order to cover up that cost.

Sharp rise in world oil prices in 1973-1975 and 1979-1980 produced
significant rise, resulting in cost push inflation.
15

16. 16
Measures to control Inflation

17. MEASURES TO CONTROL INFLATION

Monetary measure: Squeezing Credit

Fiscal measure: reducing purchasing power
17

18. 18
Monetary Measures

19. MONETARY MEASURES
1. Bank Rate
2. Cash Reserve Ratio
3. Statutory Liquidity Ratio
4. Open market Operations
5. Margin Requirements
19

20. BANK RATE
Bank Rate- The minimum rate at which RBI extends credit to commercial
Banks.
Bank Rate
In India, RBI follows type of measure in INFLATIONARY TIMES
 Dear Money measure(followed in period of boom and inflation)
-

Any increase in Bank rate results in an increase in interest rate
charged by Commercial banks which in turn leads to low level of
investment and low inflation
20

21. 21

22. CRR (CASH RESERVE RATIO)
It refers to the cash which banks have to maintain with RBI as certain percentage of
their demand and time liabilities
Cash Reserve RatioAn increase in CRR reduces the cash with commercial banks which results in low supply
of currency in the market, higher interest rate and lower the inflation
CRR
22

23. STATUTORY LIQUIDITY RATIO
Commercial Banks have to maintain liquid assets cash, gold and approved
securities equal to not less than SLR(present SLR is 23%) of their total
demand and time deposit liabilities.
Statutory Liquidity Ratio
Objectives of SLR
 restrict expansion of Bank credit
To
 augment bank’s investment in government securities
To
 ensure solvency of banks
To
SLR is increased in case of
23

24. OPEN MARKET OPERATIONS

Govt. control the money supply by issuing govt. securities in public
govt. securities are issued by by govt. to raise the funds necessary to
pay its expenses
Open Market
Operations
these securities are nothing but bonds and debentures with a certain
maturity.

These securities lock the purchasing power of public for a certain period.

Therefore sale of securities can help regulate inflation.
24

25. 25

26. MARGIN REQUIREMENTS

Margin requirement is the difference between the market value
of the security and its maximum loan value. A bank does not
advance loan equal to the market value of the security, but
less.
Margin Requirements

For example, it may lend Rs. 600 against the security worth
Rs.1000; thus the margin requirement in this case is 40%.

During inflation, the margin requirement can be raised to
reduce the loan one can get on a security.
26

27. 27
Fiscal measure

28. INSTRUMENTS OF FISCAL POLICY
 Reduction of Govt. Expenditure
 Increase in Taxation
 Imposition of new Taxes
 Public Debt
Over valuation
28

29. 29
Deflation

30. DEFLATION
A general decline in prices, often caused by a reduction in the supply
of money or credit. Deflation can be caused also by a decrease in
government, personal or investment spending. The opposite of
inflation, deflation has the side effect of increased unemployment
since there is a lower level of demand in the economy, which can
lead to an economic depression.
3
0

31. Deflation tends to occur when the
economy’s capacity, as indicated by the
position of the AS curve, grows at a faster
rate than AD. Firms have to cut prices in
order to stimulate sales and get rid of
stocks.
Deflation can be triggered by an increase
in supply. As business and consumer
confidence in the economy declines, AD
falls, resulting in
recession.
31

32. TYPES OF DEFLATIONS

DEBT DEFLATION
TYPES OF
DEFLATIONS

MONEY SIDE SUPPLY DEFLATION

BANK CREDIT DEFLATION

CONFISCATORY DEFLATION
32

33. 33
Debt Deflation

34.  This theory was given by IRVING FISHER.
 A situation in which the collateral used to secure a loan
(or another form of debt) decreases in value. This can
be detrimental because it may lead to a restructuring of
the loan agreement or the loan itself.
 Its also known as "worst deflation" and "collateral
deflation".
34

35. MONEY SIDE SUPPLY DEFLATION

36. 
This deflation is caused primarily by a reduction in the velocity
of money and/or the amount of money supply per person.

This happens when people tend to save more money which
results in decrease in the money flow.
36

37. BANK
CREDI
T
DEFLATIO
N
37

38. 
This happens when there is a decrease in the credit supply of
the bank and a contraction of the money supply from a nation’s
central bank.
 may be caused by the central bank initiating higher interest
It
rates.
38

39. CONFISCATORY DEFLATION
What it looks like
What it really
39

40. 
This is caused when central bank freezes bank deposits and
as a result it decreases money supply.

The freezing of bank deposits is done to counter inflation but if
it is not checked it may result in deflation.
40

41. EFFECTS OF
41

42. A slow-down or fall in lending leads to less money in circulation, with a further
sharp fall in money supply as confidence reduces and velocity weakens, with
a consequent sharp fall-off in demand for employment or goods. The fall in
demand causes a fall in prices as a supply glut develops. This becomes a
deflationary spiral when prices fall below the costs of financing production, or
repaying debt levels incurred at the prior price level. Businesses, unable to
make enough profit no matter how low they set prices, are then liquidated.
Banks get assets which have fallen dramatically in value since their mortgage
loan was made, and if they sell those assets, they further glut supply, which
only exacerbates the situation. To slow or halt the deflationary spiral, banks
will often withhold collecting on non-performing loans (as in Japan, and most
recently America and Spain). This is often no more than a stop-gap
measure, because they must then restrict credit, since they do not have
money to lend, which further reduces demand, and so on.
42

43. Measures to Control deflatio

44. Various measures to increase consumption and investment
expenditures in the economy.
1. Reduction in Taxation:
The government should reduce the number and burden of various taxes
levied on commodities. This will increase the purchasing power of the people.
As
a
result,
the
demand
for
goods
and
services
will
increase. Moreover, sufficient tax relief should be given to businessmen to
encourage investment.
2. Redistribution of Income:
Marginal propensity to consume can be raised by a redistribution of income
and wealth from the rich to the poor. Since the marginal propensity to
consume of the poor is high and that of the rich is low, such a measure will
help increasing the aggregate demand in the economy.
44

45. 3. Repayment of Public Debt:
During deflation period, the government can repay the old public debts. This will
increase the purchasing power of the people and push up effective demand.
4. Subsidies:
The government should give subsidies to induce the businessmen to increase
investment.
5. Reduction in Interest Rate:
By adopting a cheap money policy, the monetary authority of a country reduced
the interest rate, which stimulates investment and thereby expands economic
activity in the economy.
45

46. 6. Credit Expansion:
The central bank and the commercial banks should adopt a policy of credit
expansion to promote business and industry in the country. Bank credit should be
made easily available to the entrepreneurs for productive purposes.
7. Foreign Trade Policy:
To control deflation, the government should adopt such a foreign trade policy that, on the
one hand, increases exports, and, on the other hand, reduces imports. This kind of policy
will go a long way in solving the problem of overproduction, and help overcoming deflation.
8. Regulation of Production:
Production in the economy should be regulated in such a way that the problem of overproduction does not arise. Attempts should be made to adjust production with the existing
demand to avoid over-production.
46

47. CONCLUSION
Fiscal policy alone or monetary policy alone is not
sufficient to check deflation in an economy. A proper
co- ordination of fiscal, monetary and other measures
is essential to effectively deal with the deflation-ary
situation.
47