Inflation. Definition Inflation is a state of persistent rise in prices Note:  this does not mean that all prices must be rising during a period of.

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Presentation transcript:

Inflation

Definition Inflation is a state of persistent rise in prices Note:  this does not mean that all prices must be rising during a period of inflation –some prices may even be falling; but the general trend must be upward  It is a process of rising prices & not a state of high prices

Measuring Inflation Inflation is the rate of change in the price level If the price level in the current year is ‘P1’ & in the previous year is ‘Po’, then inflation for the current year is (P1 – Po)/ Po x 100

Types of Inflation Suppressed & Open Inflation Demand Pull Inflation Cost-push inflation Mixed inflation Structural/Sectoral demand shift inflation Mark-up inflation

Wage-Price Spiral When W ↑ → P ↑ → cost of living of the workers ↑ Again when W ↑ → P ↑ → real wage rate ↓  Both the consequences lead the trade unions to claim a higher money wage  If this claim is granted by employers, there is a second round price inflation caused by the cost factor  Thus, there is a wage-price spiral W ↑ → P ↑ → W ↑ → P ↑

Types of Cost Push Inflation Wage -push inflation → cost inflation stemming from trade union pressure on wage rate Profit - push inflation → inflation caused by monopolistic practices of the managers of firms who increase prices even in the absence of increase in demand or rising costs Inflation if there is excess demand in some sectors without no excess demand in other sectors → excess demand in some sectors → P ↑→ excess demand for labour → W ↑ here → trade union in other sectors will demand W ↑. If this claim is granted W ↑ in these sectors with no excess demand → cost inflation

Concepts of Deflation, Disinflation,Reflation & Stagflation Deflation – is a condition of falling prices on account of insufficient effective demand. Results in a continuous fall in level of economic activity & growing unemployment Disinflation – it is a process of lowering costs & prices when they are excessively high. Brings down inflationary trend in prices without causing unemployment Reflation – is a moderate degree of inflation that is deliberately undertaken to relieve depression Stagflation – a situation in which a high rate of inflation prevails simultaneously with a high rate of unemployment or stagnant economic condition. It is a combination of inflation & stagnation

Effects of inflation Effects on Production Effects on Income distribution Other Effects

Control of Inflation Monetary Measures Fiscal Measures Other Measures

The inflation rate in India was recorded at 7.80 percent in August of Inflation Rate in India averaged 9.44 Percent from 2012 until 2014, reaching an all time high of Percent in November of 2013 and a record low of 7.31 Percent in June of Inflation Rate in India is reported by the Ministry of Statistics and Programme Implementation (MOSPI), India.