Presented By

GURPREET SINGH (8032)

YOGESH (8022)
 CONTENTS
• Introduction
• Defination
• Inflation rate
• Degrees of inflation
• Types of Inflation
• Causes of Inflation
• Effects of Inflation
• How Inflation is Measured?
• Measures to control inflation
• Inflation in developed nations
• Inflation in developing nations
• Inflation in INDIA
• Main reasons for inflation in India
• Steps taken by Government of India to control inflation
• Some Myths About Inflation In INDIA
 Introduction
• Inflation generally means rise in prices.
• Inflation is an increase in the price of a basket of
goods and services that is representative of the
economy as a whole.
• It is a persistence and substantial rise in general level
of prices after full employment level of output.
• A situation is described as inflationary when either
the prices or the supply of money are rising, but in
practice both will rise together
 Definition

• a general and progressive

increase in prices; "in
inflation everything gets
more valuable except
money”
• In economics, inflation is
a rise in the general level
of prices of goods and
services in an economy
over a period of time....
 What is Inflation rate?

The rate at which the prices of

everything go up is called
the "rate of inflation"
Formula:
• Inflation Rate = (Po- P-1)*
100 / P-1,
where
Po = the present average price
P-1 = the price that existed last
year.
 Degrees of Inflation
• Creeping Inflation
• Running Inflation
• Galloping Inflation
• Hyperinflation
Types Of Inflation
 Types of Inflation

• Cost-push inflation: Situation where price rises

due to growing factor cost.
• Demand-Pull inflation- : Aggregate demand is
more than aggregate supply.
• Stagflation-: Situation when both inflation rate
and unemployment rate are high
• Sectoral Inflation : When there is an increase in
the price of the goods and services produced by a
certain sector of industries.
Causes of Inflation
 Causes of Inflation
• For controlling the rates of commodity, we must
know why these rates are rising i.e. inflating
which means what are the reasons or causes
behind inflation. There are various factors which
causes inflation in the economy which is as
follows-
• Monetary Factors
• Non-monetary Factors
• Structural Factors.
 Monetary Factors
• Expansion Of Money Supply
• Increase in Disposable Income
• Increase in Consumer Spending
• Development And Non Development
Expenditure
• Indirect Taxes
• Demand for Foreign Commodities
 Non Monetary Factors
• Rising Population
• Natural Calamities
• Speculation and Black Money
• Bottleneck and Shortages
 Structural Factors
• Capital Shortage
• Infrastructural Bottlenecks
• Limited Efficient Entrepreneurs
• Lack of Foreign Capital
Effects of Inflation
 Positive effects of inflation
• Business Growth
• Encourages investment from foreign companies
• Reduce unemployment
• Rising asset Values
• Higher Stock Values
• Falling Debt Values
• Redistribution of income from savers to borrowers
 
 Negative effects of inflation
• Decrease in real Income
• Devaluation of the exchange rate
• Unsustainable economic growth
• Difficult to predict future costs
How to Calculate
Inflation
 Measuring Inflation
Inflation is measured by calculating the percentage
rate of change of a price index, which is called the
inflation rate
• Consumer Price Index

• Wholesale Price Index

 Wholesale Price Index
• First published in 1902
• Measures the change in the average price level of
goods traded in wholesale
market.
• A total of 435 commodities data on price level is
tracked through WPI
• Available on a weekly basis
• Indian government has taken WPI as an indicator of the
rate of inflation in the economy.
 Consumer Price Index
• CPI measure of a weighted average of prices of a specified
set of goods and services purchased by consumers
• An index is scaled so that it is equal to 100 at a chosen
point in time, so that all other values of the index are a
percentage relative to this one.
• Most countries use the CPI as a measure of inflation
(United States, United Kingdom,Japan,France ,Canada)
• Measures the increase in price that a consumer will
ultimately have to pay for.
• The governments there review the commodity basket of
CPI every 4-5 years
Measures to Control
Inflation
 Measures to control Inflation
• These are the following measures taken to control
inflation
1) Monetary Measures
2) Fiscal Measures
3) Other Non-monetary Measures
 Monetary Measures
• Credit Control
– Raising Bank Rates
– Open Market Operations
– Variable Reserve Ratio
– Fixation of Margin Requirements
– Regulation of Consumer Credit

• Demonetization of currency- Demonetization is the

process of ceasing to produce and circulate particular forms of currency
• Issue of new currency- Under this system, one new note is
exchanged for a number of notes of the old currency
 Fiscal Measures
• Taxation
• Public Expenditure
• Public Borrowing
• Inducement to Save
 Other Non monetary Measures
• Increase in output
• Price control & Rationing
• Imports
• Wage Rates
 Inflation rates in the Developed
Nation
According to an IMF report, New Zealand 3%
headline inflation in the
developed nations is UK 2.9%
expected to decline from
3.5% in 2008 to a record Australia 2.5%
low of 0.25% in 2009 For
the quarter ended March EU 0.6%
31, 2009, the current
inflation rates of major Japan -0.3%
nations are listed in the
table given below: US -0.4%
 Inflation in Developing Nations
• India has the highest rate of India 13.7%
inflation among major
developing economies, Indonesia 5.1 %
Minister of State for Finance
Namo Narain Meena
Brazil 4.8 %
informed the Lok Sabha. In China 2.9 %
June, 2010, India's Russia 5.8 %
inflation based on the
Consumer Price Index for Pakistan 12.7 %
Industrial Workers (CPI-IW)
stood at 13.7 percent, much Sri Lanka 4.8 %
higher than that of Indonesia,
Brazil, China and Russia Bangladesh 8.5 %
Inflation in India
 Inflation rates in India
• Inflation rate as measured by the WPI with a revised
base of 2004-05 decelerated to 8.5% in August,
primarily due to fall in prices, of primary articles,
compared to 9.8% in the previous month
---------Business Standard Newspaper (15/09/2010)
 Main reasons for inflation in
India
• Increasing Government expenditure-
1950-51 government expenditure was 530 crores, it rises up to 281912
crores in 1998-99.
• Increasing Money Supply- Continuous rise in money
supply is one of the reasons of growing inflation in India. As records
shows In1995-96 money supply was 604007 crores, in 1999-2000 it raises
to 1117201 crores
• Rising Population
• Rising prices of crude oil- as records show
in1980 alone, there was 130%increse in all
fuel prices by OPEC
 Continued...
• Violent Fluctuation in output
• India's agricultural output suffered a sharp
drop due to bad weather last year as a result,
supply declined and prices rose.
• Increase in borrowing money from Other
countries and world bank and increase the
interest burden which increase inflation
Steps taken by Government of
India to control inflation
• 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) 25 bps to
5.25%

• RBI increases reverse repo rate (at which banks park excess cash with
the central bank) by the 25 bps to 3.75% on 24 April 2010 as inflation
in April 2010 touches 13.33%

• The RBI also buys dollars from banks and exporters, partly to prevent
the dollars from flooding the market and depressing the dollar —
indirectly raising the rupee

• Sale of securities by RBI under open market operations

• RBI increased the cash reserve ratio (CRR), the portion of deposits
bank need to keep with the central bank by 25 basis points. The CRR
increase will take effect on 24 April and absorb Rs12, 500 crores of
excess cash from the banking system.

• Liberalisation of imports, banning exports and a cut in excise and

customs duties are among the steps taken by the United Progressive
Alliance (UPA) Government to control inflation in the country.
 SOME MYTHS ABOUT INFLATION IN
INDIA
• Inflation will fall back to a normal range on its own what we
really need are reforms to encourage supply

• Monetary tightening will kill the expansion

• Administrative measures are as good as - or better than -

monetary tightening for controlling inflation

• A stronger rupee does nothing to control inflation

• Policy tightening will deny credit to small businesses and the

common man, as well as hurt the poor