INFLATION

MEANING & DEFINITION Inflation means a considerable and persistent rise in the general level of prices over a long period of time. According to Crowther, “Inflation is a state in which the value of money is failing i.e. the prices is rising.”

Features of Inflation Inflation involves a process of the persistent rise in prices. It involves rising trend in price level. It is a state of disequilibrium. It is scarcity oriented. It is dynamic in nature. Inflationary price rise is persistent and irreversible. Inflation is caused by excess demand in relation to supply of all types of goods and services. It is a purely monetary phenomenon. It is a post full employment phenomenon. It is a long-term process

Types of Inflation On the Basis of Rate of Inflation Creeping inflation Walking inflation Running inflation Galloping (or) Hyper Inflation On the Basis of Degree of Control Open Inflation Suppressed Inflation Anticipated versus unanticipated inflation Inflation on the Basis of Causes Demand Pull Inflation Cost Push Inflation Profit Induced Inflation Budgetary Inflation Monetary inflation Multi Casual inflation On the Basis of Employment Partial inflation Full inflation

The demand-pull Inflation S D2 D1 D0 Price Level Real Income Y0 P0 P1 P2

Mixed Demand Inflation S Y0 Y1 Y2 D2 D1 D0 P2 P1 P0 Real Income Price Level

Open Inflation Walking inflation Creeping inflation Running Inflation Hyper Inflation Time (Years) Percentage rise in price level D C B A

Causes of Inflation Factors Affecting Demand Factors affecting supply Shortage of factors of production Industrial dispute Natural calamities Artificial scarcities Increase in exports Lop- sided production Law of diminishing returns International factors Increase in money supply Increase in disposable income Increase in public expenditure increase in consumer spending Cheap Monetary Policy deficit financing expansion of the private sector black money repayment of public debt increase in exports

Effects of inflation Positive effectsNegative effects Benefit to inflators Early and first recipients of the inflated money Big cartels, destroys small sellers Borrowers Inflation may reduce the severity of economic recessions Tobin effect (can increase investment ) Hoarding Distortion of relative prices Increased risk - Higher uncertainties Income diffusion effect Existing creditors will be hurt Fixed income recipients will be hurt Increased consumption ratio at the early stages of inflation Lowers national saving Illusions of making profits Causes mal-investment, tax bracket & business cycles Currency debasement Rising prices of imports