RAHUL BABAR

What is Inflation ?

Inflation is defined as a sustained increase in thegeneral level of prices for goods and services.

It is measured as an annual percentage increase.

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

How do you measure inflation ?

Bureau of labor statistics calculates using CPI

Consumer Price Index

The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.

CPI

HousingFuel

ServicesTransportationMedical Care

HousingFuel

ServicesTransportationMedical Care

Rs 100 Rs 105

YEAR 1 YEAR 2

Increase by Rs 5 which is 5% increase

5% Inflation rate

Why should we care ?We can compare inflation numbers to other statistics,

such as income, output and investments to assess “real” growth.

Inflation Rate in India (by years)

What are the causes for Inflation ?

Demand Pull Inflation

Cost Push Inflation

Wage Price Spiral Inflation

Demand Pull Inflation

Inflation caused by increase in aggregate demand

Cost Push Inflation

Inflation caused by decrease in aggregate supply

Wage Price Spiral Inflation

“Wages chase prices and prices chase wages”

Workers get pay rise to

compensate for inflation

Rise in pay rates pushes prices up

even further

Workers get pay rise to

compensate for inflation

Rise in pay rates pushes prices up

even further

Prices go up

Effects of Inflation

Adverse effect on production

Adverse effect on distribution of income

Obstacle to development

Changes in relative prices

Adverse effect on the Balance of payment

Measures for Inflation

Monetary Measures

The actions of a central bank, currency board orother regulatory committee that determine thesize and rate of growth of the money supply in

the economy.

Increasing Interest RatesCash Reserve Ratio (CRR)

Sale of Govt. securities in open market

Fiscal Measures

Fiscal measures to control inflation include taxation, government expenditure and public

borrowings.

Reducing Govt. ExpenditureIncreasing tax ratePublic Borrowing

Debt managementOvervaluation of currency

Conclusion