3. INTRODUCTION
Inflation is a rise in prices, which can be translated as the decline
of purchasingpower over time. The rate at which purchasingpower
drops can be reflected in the average price increase of a basket of
selected goods and services over some period of time.
Inflation can be contrasted with deflation, which occurs when prices
decline and purchasing power increases.
Value of money Depreciates with the occurrence of Inflation .
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INFLATION
5. DEMAND PULL INFLATION
Thisiswhentheaggregate demand inan economy exceeds the aggregatesupply. Thisincreaseinthe
aggregate demand might occur due to anincreaseinthe money supply or income or thelevel of public
expenditure.
Thepricerises whichleadstoafallindemandanda riseinsupply.
INFLATION
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10. INFLATION 10
CAUSES OF INFLATION
An increasein the supplyof money is the root of inflation, though thiscan play out through
differentmechanisms in the economy. A country's money supply can be increasedby the
monetary authoritiesby:
•Printingand givingaway more money to citizens
•Legally devaluing(reducing the value of) the legal tender currency
•Loaning new money intoexistence as reserve account creditsthrough the banking system
by purchasinggovernment bonds from bankson the secondary market (the most common
method)
In all of thesecases, the money ends up losing itspurchasingpower. The mechanisms of how
this drivesinflationcan be classifiedinto three types: Demand-pullinflation, Cost-push
inflation,and Built-ininflation.
11. DEMAND PULL INFLATION
Demandpull Inflation when anincreaseinthe supply of money and
creditstimulates the overalldemandfor goodsandservicesto increase
more rapidlythanthe economy'sproductioncapacity.
COST PUSH INFLATION
Costpush Inflationis a result of the increasein pricesworkingthrough
the productionprocess inputs. When additionsto the supply of money
and creditarechanneled into a commodity orother assetmarkets,costs
for all kindsof intermediategoods rise.
BUILTIN INFLATION
As demand-pullinflationandcost-push inflation occur,people expect
currentinflation ratesto continue in the future. As such, workersmay
demandmorecosts or wagesto maintaintheir standardof living.Their
increasedwagesresult ina highercost of goodsandservices.
INFLATION 11
12. ADVANTAGES
Individuals with Tangibleassets (likeproperty or stocked
commodities) pricedin their home currency may like to see some
inflation as that raises the price of their assets,which they can
sell at a higherrate.
Inflation often leadsto Speculation by Businessesin riskyprojects
and by individualswho invest in company stocks
If the purchasing power of money falls over time, then there may
be a greater incentive to spend now insteadof savingand
spendinglater. It mayincreasespending,which mayboost
Economic activities in a Country becausethey expect better
returns than Inflation.
INFLATION 12
13. DISADVANTAGES
o Buyersof such assetsmay not be happy withinflation, asthey will be requiredto
shell out more money. People who hold assetsvaluedin their home currency, such
ascashor bonds, may not like inflation,asit erodesthe realvalue of their holdings.
o Highandvariableratesof inflationcan imposemajor costs on aneconomy.
Businesses, workers,andconsumers must all accountfor the effects of generally
risingpricesin their buying,selling, andplanning decisions.
o Inflationdoes driveup some pricesfirstanddrivesup other priceslater. This
sequentialchangein purchasingpower andprices (knownasthe Cantillon effect)
meansthat the process of inflationnot only increasesthe generalpricelevel over
time. But it also distortsrelativeprices,wages,andratesof returnalong the way.
INFLATION 13
14. CONTROLLING INFLATION
There are broadly two ways of controlling inflationin an economy
1. Monetary measures
2. Fiscal measures
Monetary measures
The most important and commonly used method to control inflation is
monetary policy of the Central Bank.Most Central Banksuse high
interest rates as the traditional way to fight or preventionplan
Money measures used to control inflation include
1- Bankrate policy
2- CRR (CASH RESERVE RATIO)
3- OPEN MARKET OPERATIONS
INFLATION 14
15. FISCAL MEASURES
Fiscal measures to control inflation include
taxation government expenditure and public
borrowings
Fiscal measures used to control inflation
includes
1- Increase in Taxes
2- Increase in Savings
3- Surplus Budgets
INFLATION 15
16. 16
Year Indices Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2023 CPI 6.52% 6.44% 5.66% 4.70% 4.25% 4.81% 7.44% 6.83% 5.02% 4.87%
WPI 4.73% 3.85% 1.34% (-)0.92% (-)3.48% (-)4.12% (-)1.36% (-)0.52% (-)0.26% (-)0.52%
2022 CPI 6.01% 6.07% 6.95% 7.79% 7.04% 7.01% 6.71% 7% 7.41% 6.77% 5.88% 5.72%
WPI 12.96% 13.11% 14.55% 15.08% 15.88% 15.18% 13.93% 12.41% 10.70% 8.39% 5.85% 4.95%
2021 CPI 4.06% 5.03% 5.52% 4.29% 6.30% 6.26% 5.59% 5.30% 4.35% 4.48% 4.91% 5.59%
WPI 2.03% 4.83% 7.39% 10.49% 12.94% 12.07% 11.16% 11.39% 10.66% 12.54% 14.23% 14.27%
2020 CPI 7.59% 6.58% 5.84% * * 6.26% 6.73% 6.69% 7.27% 7.61% 6.93% 4.59%
WPI 3.01% 2.26% 1.00% -1.57% -3.37% 1.81% -0.58% 0.16% 1.32% 1.31% 1.55% 1.95%
(* The Government of India did not release the CPI inflation rate for April and May 2020 due to nationwide lockdown
induced by the Covid-19 pandemic.)
AVERAGE INFLATION RATE IN INDIA (4 YEARS)
