Inflation

INFLATION INFLATION means a rise in the general level of prices of goods and services over time Different economists defined inflation as:According to Gregory: “inflation is an increase in the purchasing power” Coulbourn: “inflation is the stage of too much money chasing too few goods”.

Keynesian view of inflation Keynes explains the concept of inflation with reference to the level of “employment”. He divide it into two parts:-

• Semi-Inflation: » When there is an increase in the quantity of money before full employment leads to increase in output and employment. Also called “Bottleneck inflation”.

• Open or Full Inflation » When there is an increse in the quantity of money after full employment leads to general rice in the price level. SOURCE: MACROECONOMICS BOOK

Y FULL EMPOYMENT

P2 OUTPUT/PRICES

P1 PRICE LINE

Q1

Q2

E

Q

FULL- INFLATION

SEMIINFLATION

O

M1

M2

F

MONEY SUPPLY

M3

M4

X

TYPES OF INFLATION There are many types of inflation. It can be classified on the basis of the following:-

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On the Basis of Degree of Government Control » Open inflation » Suppressed Inflation

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Classification on the Basis of Time » War time inflation » Post-war Inflation » Peace Time Inflation

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On the Basis of Rate of Inflation » » » »

Creeping Inflation( 3% in prices) Walking Inflation (3% to 5% in prices) Running (5% to 10% in prices) Galloping Inflation (10% to 20% in prices)

Theories of Inflation There exists two theories relating to the causes of Inflation

• Demand Pull Inflation » Due to

in demand

• Cost Push Inflation » Due to

in cost of production

Demand Pull Inflation According to this theory , inflation refers to a situation when Demand >> Supply. d6

PRICE LEVEL

p4

d5

p3

d4

p2 p1

d3 d1 d2

p O

M M1

M2 OUTPUT

M3

M4

COST PUSH INFLATION It is the inflation when there is an increase in the cost per unit of production this is caused due to :* lack of raw material *increase in taxes * increase in the tariffs on transportation, raw materials, power, fuels etc.

Inflationary Gap !!! Is the excess of anticipated expenditure over the available output at base prices.

particulars 1. 2. 3. 4. 5. 6. 7.

National Income paid Taxes Disposable Income Gross national output Govt. expenses Available output for public Inflationary Gap

Amount(Rs. Crore) 1,800 400 1,400(1,800-400) 1,500 300 1,200(1,500-exp300) 200(1,400-1,200)

TREND OF INFLATION IN 2008 11 APRIL-7.41% 2 MAY -7.57% 3 MAY -7.82% 4 JUNE-8.24% 5 JUNE-11.05% 6 JULY-11.63% 7 JULY-11.89% 8 AUG-12.01% 14 AUG-12.44% 21 AUG -12.63%

So how does India calculate inflation? • India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy

And how is it calculated in developed countries? • Most developed countries use the Consumer Price Index (CPI) to calculate inflation. SOURCE: REDIFFNEWS

WHOLESALE PRICE INDEX • PUBLISHED IN 1902 • IS AN INDICATOR TO MEASURE THE CHANGE IN GENERAL PRICE LEVEL OF GOODS • BASED ON WEEKELY BASIS • A TOTAL OF 435 COMMODITIES DATA ON PRICE LEVEL IS TRACKED THROUGH “WPI”. SOURCE: REDIFF NEWS

WPI CONT.. • GOVT. WIL ADOPT REVISED WPI. • 980 COMMODITIES ISTEAD OF 435. • REVISED BASE YEAR 2004-05 FROM CURRENT BASE YEAR 1993-94.

CONSUMER PRICE INDEX • ADOPTED BY DEVELOPED COUNTRIES IN 1970’S • IS A STATISTICAL TIME SERIES MEASURE OF WEIGHTED AVERGE OF PRICE OF SET OF GOODS • FIXED QUANTITY PRICE INDEX(SCALE OF 100) • IS THE OFFICIAL BAROMETER OF INFLATION IN COUNTRIES LIKE:US,UK,JAPAN,FRANCE,CANADA,SINGAPORE and CHINA • BASED ON THE MONTHLY BASIS

WHY NOT CPI IN INDIA???? •

there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are: CPI Industrial Workers; CPI Urban Non-Manual Employees; CPI Agricultural labourers; and CPI Rural labour.

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Secondly, officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers. In fact, as of May 21, the latest CPI number reported is for March 2006.

CONTROL MEASURES • MONETARY MEASURESRBI SQUEEZES MONEY SUPPLY . INCREASED REPO RATE INCREASED CRR

CONTROL MEASURES CONT. • FISCAL MEASURESREDUCE IMPORT DUTIES. BANNED EXPORT OF MANY COMMODITIES. BAN OF FUTURE TRADING

CONTROL MEASURES CONT.. • •

SIZING UP SPECULATORS. INVERTING ENERGY SUBSIDIES-(SUGGESTED)

- INCREASE THE USE OF NATURAL GAS. - CNG PIPED INTO HOMES. - NEW COAL LIQUEFICATION TECHNOLOGY. - PRIVITISING OR ATLEAST EXPANDING THE RAIL NETWORK. - INTRODUCTION OF GOOD QUALITY AIR CONDITIONED PUBLIC TRANSPORTATION. - SHIFTING SUBSIDIES FROM FUEL TO ELECTRIC HYBRID AND HYDROGEN CARS.

EFFECTS OF INFLATION • WAGE-PRICE SPIRAL • REDUCTION IN REAL VALUE OF SAVINGS • CONSUMERS AND BUSINESS ON FIXED INCOME WIL LOOSE OUT • HIGHER NOMINAL INTEREST RATE. • DISRUPTION OF BUSINESS PLANING. • INEFFECIENT ALLOCATION OF RESOURCES