Inflation

Download as pptx, pdf, or txt
Download as pptx, pdf, or txt
You are on page 1of 12

INFLATION

PREPARED BY
MR. GUNJAN MILIND CHAUDHARI
ASSISTANT PROFESSOR
INFLATION

 In economics, inflation is defined a sustained increase in the general price level of


goods and services in an economy over a period of time.

 It is measured as an annual percentage increase.

 When the general price level rises, each unit of currency buys fewer goods and
services.

 This implies that inflation reflects a reduction in the purchasing power per unit of
money. In other words, inflation indicates a loss of real value in the medium of
exchange and unit of account in the economy.
Types of Inflation
 Creeping Inflation:

Creeping Inflation also known as a Mild Inflation or Low Inflation refers to that type
of inflation when the rise in prices is very slow like that of snail or creeper. It is the
mildest form of inflation with less than 3% per annum.

 Chronic Inflation:

If creeping inflation persist for a longer period of time then it is often called as
Chronic or Secular Inflation. It is called chronic because if an inflation rate continues
to grow for a longer period without any downturn which may possibly lead to
Hyperinflation.
 Running Inflation:

A rapid acceleration in the rate of rising prices is referred as Running Inflation. This type of inflation
occurs when prices rise by more than 10% per annum.

 Walking or Trotting Inflation:

When prices rise moderately with a single digit of less more than 3% but less than 10% per annum it is
called as Walking Inflation.

 Galloping Inflation:

Galloping inflation also known as Jumping inflation occurs when prices rise by double or triple digit
inflation rates of more than 20% but less than 1000% per annum. Some Latin American countries like
Brazil and Argentina had experienced inflation rates of over 100 per cent in the 1970s.

.
 Stagflation

The term stagflation (stagnation plus inflation) refers to the situation where an economy grows very slowly or at
zero rate (stagnant) and prices keep rising. The side effects of stagflation are increase in unemployment-
accompanied by a rise in prices, or inflation. It raises economic dilemma as the actions designed to lower inflation
may worsen unemployment and vice versa. This happened during the 1970s, when crude oil prices rose
dramatically, fueling sharp inflation in developed economies.
 Hyperinflation:

When prices rise at an alarming high rate with quadruple or four digit inflation rate of above 1000% per annum then
is termed as Hyperinflation. It is a situation where the prices rise so fast that it becomes very difficult to measure its
magnitude. During a worst case scenario of hyperinflation, value of national currency of an affected country reduces
almost to zero. Paper money becomes worthless and people start trading either in gold and silver or sometimes even
use the old barter system of commerce. Two worst examples of hyperinflation recorded in world history are of those
experienced by Hungary in year 1946 and Zimbabwe during 2004-2009 under Robert Mugabe's regime
 Deflation
Deflation is a situation where there is a consistent decline in price level. Here again you have to
notice the words ‘consistent’ and ‘price level’. Thus decline in price of a single commodity cannot be
terms as deflation. A situation of deflation arises when aggregate demand is lower than aggregate
supply. Thus, deflation is characterized by a decrease in output, increase in unemployment, and
general slowing down of the economic activities. The Great Depression of 1930s is an example of an
acute deflation when prices crashed, unemployment increased to a very high level, and GDP of the
developed countries fell sharply. There are many adverse effects of deflation. Deflation in a modern
economy is bad because it increases the real value of debt, and discourages production in the
economy as prices keep falling.
Causes of Inflation

 Demand-Pull Inflation:
Demand-Pull Inflation also known as Excess Demand Inflation takes place when aggregate demand
for a good or service outstrips aggregate supply. In other words, when aggregate demand for all
purposes- consumption, investment and government expenditure-exceeds the supply of goods at
current prices then it is called Demand-Pull Inflation. Demand-Pull inflation gives rise to a situation
often economists describe as “Too much money chasing too few goods”

 Cost-Push Inflation:

When prices rise due to growing cost of production of goods and services then it is known as Cost-
Push Inflation. Cost-push inflation also came to known as “New Inflation” is determined by supply-
side factors mainly caused by higher wage-push, Profit-Push and higher costs of raw materials.
 Scarcity Inflation:
Scarcity inflation occurs due to hoarding by unscrupulous traders and black marketers so as to
create an artificial shortage of essential goods like food grains, kerosene,etc. with an intension to sell
them only at higher prices to make huge profits.

 Structural Inflation:
Structural inflation is that type of inflation often experienced in developing countries which is
caused by structural rigidities such as agricultural bottlenecks, resource constraints bottlenecks,
foreign exchange bottlenecks, physical infrastructural bottlenecks etc.
Effects of Inflation

 Debtors and Creditors

 Fixed Income Groups

 Traders and Investors

 Agriculturalists

 Government
Indices in Inflation

Wholesale Price Index

 The Wholesale Price Index represents the price of a basket of wholesale


goods. WPI focuses on the price of goods that are traded between corporations. It
does not concentrate on goods purchased by the consumers.

 The main objective of WPI is monitoring price drifts that reflect demand and
supply in manufacturing, construction and industry.

 WPI helps in assessing the macroeconomic as well as microeconomic conditions


of an economy.
Consumer Price Index

 Consumer Price Index or CPI is the measure of changes in the price level of a basket of consumer
goods and services bought by households. CPI is a numerical estimation calculated using the
rates of a sample of representative objects the prices of which are gathered periodically.

 The CPI captures changes in price level at the consumer level.

 Changes in prices at the producer level are tracked by the Wholesale Price Index (WPI).

 CPI can capture the change in the prices of services which the WPI cannot.
Thank You

You might also like