Prof. Vishwa Ballabh
Short Notes on Inflation
Krishna Kant Sharma
J. P. Nagar Centre
Inflation generally occurs when there would be a rise in the price level over a period of
time. It gauges the rise in the price level and also the degraded value of money, so we can
say that it happens when there is a rise in the supply of money.
In almost all the cases of large and persistent inflation, the culprit is the growth in the
quantity of money. When the government creates large value of national currency the
value of money fall.
Measurement of inflation:
Inflation is generally measured with reference to the price index of a country which would
represent the measure of overall price levels of the goods and services of an economy. E.g.
Consumer price index (CPI), Producer price index (PPI), etc.
Consumer price index(CPI)
This helps in measuring the price change in the goods and services purchased by the
end users or end consumers. It is the percentage of price change over a period of time.
Inflation rate = Price2-price1 * 100
Producer price index (PPI)
This helps in measuring the price change by the domestic producers for there outputs or
may be we can call it at the wholesale level. It is also referred to as WPI (wholesale
Gross domestic product deflator (GDP)
This helps in measuring the change in price levels of all the products and goods and
services including all gross domestic products. It’s the percentage of normal GDP over
i.e. Normal GDP*100
Four basic types of inflation
Demand pull inflation
This happens when the demand of the services and good increases as compared to the
supply of goods and services in the market and hence leads the rise in the price to
achieve equilibrium in the sift and demand curves. This happens due to many factors
for example. Decrease in agriculture and industrial production, inefficient infrastructure
facilities, increase in population, etc.
This happens due to the increase in the price of production of goods and services. If the
cost of production increases due to any reason this leads the business owners in the
market to raise the prices of their goods and services which intern effect the end
consumers who are also an employee and a part of the economy. For example. Increase
in import prices.
Price power inflation
This happens usually when the business owners increase the prices of their goods and
services in order to get a higher profit margin. Though it is rare during the recession
time but yes it happens sometimes when the market economy is booming and the
company’s sales is strong.
This happens due to some government monetary policies this is not induced by the
supply and demand factor of any market economy. These policies are generally induced
by the central governing bank of the country. For e.g. consumer credit regulations.
Increase in the general level of prices would reduce the purchasing power of money.
The effect of inflation can be brutal for elderly who are looking forward to retire on a
fixed pension income. If the supply and demand balance spiral will go out of control it
would change the habit of consumer’s purchasing behavior and buyers will change their
habits as their purchasing threshold which would intern lead the producers to suffer and
be forced to cut their output.
Inflation changes the allocation of income. It affects the more to the lenders in the
market than the borrower as the loan sanctioned during the persisting inflation would be
paid back as inflated money.
Inflation leads the handful consumer to make an extensive speculation to derive the
advantage of high risk investment. Inflation also affects the treasury of any nation.
Indian stock market along with the global markets did respond to the rise in the US
inflation. Expectations of further rate cuts and injection of liquidity into money markets
have been dampened after the news on inflation. Central banks face their most difficult
times when economies are faced with both a slowdown in growth and a rise in inflation.
If inflation gets totally out of control (in the upward direction), it can grossly interfere
with the normal workings of the economy, hurting its ability to supply.
The point that is being made is that if inflation is not contained and rises at an
unsustainable rate then it leads to a stronger the impact on the other side. There is a
saying; "the bigger they are, the harder they fall.
In today’s world inflation is haunting India. In general the primary way of controlling
inflation is the monetary principle. Most central banks are tasked to keep the loans lending
rate at a low level to target a rate of around 2 to 3 percent /annum. And it should be within
a low aimed inflation range. Monetarists emphasize increasing interest rates (slowing the
rise in the money supply, monetary policy) to fight inflation. Government and the RBI
should try to control inflation through monetary policies, essentially by sucking out excess
liquidity in the market. Over-dependence on monetary measures to control inflation could
slow down industrial growth and lead to recession. Government should crack down on
hoarders and at the same time government has to advice the end users not to panic.
Few policy induced towards supply-side shortage would be necessary to address.
Government should subsidies imports to keep domestic prices under control. However, this
has to be done without hurting the interests of producers at home. Though some of these
measures are a short terms measure as the food securities for the nation would need a long
term planning for the demand and supply mismatch.