Inflation
@barracksbuddy @barracksbuddy
It is a general rise in prices or price levels of goods and services in an economy . Inflation is
not a rise in price of a certain good or goods , it is a general rise in prices that an entity
experiences which may be because of increase of one good, some goods or all goods.
Creeping Inflation : 0% - 4% is considered good for economy
Reasons responsible
@barracksbuddy @barracksbuddy
for Inflation
Inc. in income , inc. in population
Demand-pull Inflation (inc. in inflation due to Inc. in government expenditure
general inc. in demand of goods and services )
Easy availability of money
Inc. cost of commodities
Cost-push Inflation (inflation due to factors Generally poor business environment
which cause a general Inc. cost of FoPs
Hoarding : Illegal stocking quantity of goods more than what is legally allowed
Cartelization : When producers collude with each other rather than competing
as a result , market prices are kept artificially high by producers
Some terms related to
@barracksbuddy @barracksbuddy
Inflation
Hyperinflation : When inflation becomes intolerable. There is no defined rate at which it
occurs. Galloping Inflation , Trotting Inflation , Running Inflation , walking
inflation , shoe-leather inflation etc.
Headline Inflation : It is a measure which is reported in general. CPI-C is the headline
measure of inflation.
Skewflation : When price rises due to just a few components of entire basket
Core Inflation : We remove those items from headline basket which are highly volatile
(food and fuel) and measure change in price of remaining basket
price of petrol and diesel included as ‘miscellaneous’ group of items
Crude oil, LPG , Kerosene are removed as they are part of ‘fuel and
light group’
@barracksbuddy @barracksbuddy
Structural Inflation : Inflation attributed to those factors which are slow to change ,i.e. , that
cannot be addressed in the immediate term
Spiral Inflation : It means that inflation causes some effect , and that effect again leads to
inflation. Eg : Price-Wage Spiral
Deflation : A fall in prices , that is , opposite of inflation
Disinflation : A fall in rate of inflation , i.e. decline in pace at which prices are rising
Reflation : It is an attempt to create inflation in an economy by government such as through
spending more money
Shrinkflation : When size of packet shrinks , i.e. quantity that one gets for same value
is less
@barracksbuddy @barracksbuddy
Stagflation : Stagnation of economy + High Inflation
It plots historical observations of prices
and UE.
When price are high , UE is low and when
UE is high prices are low
However , there were some years when
both inflation ,i.e. prices and UE were
high , such situation is called Stagflation
There is no clear path for policy makers
during this time
Relation b/w inflation and UE using Philips curve
@barracksbuddy @barracksbuddy
Wholesale Price Index
PPI WPI CPI
Basket is formed considering a sample set of commodities. Represents various strata of economy .
Includes only Goods , not services
Basket further classified as : Primary articles (Food articles , Non-food articles , Minerals , crude
petroleum , natural gas) 22.62%
: Manufactured Products (Food products , Tobacoo , beverages ,
textiles , Leather etc.) 64.23%
: Fuel and Power (Coal , mineral oils , electricity) 13.15%
Base Year = 2011 - 2012
Released by Office of Economic Advisor in DPIT (Dept for Promotion of Industry and Internal
Trade)
WPI is measured point-to-point which means , the index value of this month is calculated with
reference to the same month in Base year
@barracksbuddy @barracksbuddy
Consumer Price Index
Includes Goods and Services
It is released by CSO (Central Statistics Office)
Basket classified as : Food and Beverages
: Pan , tobacco and intoxicants
: Fuel and light
: Housing
: Clothing and Footwear
: Miscellaneous
CPI-U : Urban consumers
CPI-R : Rural Consumers
CPI-C : Combined Consumers
@barracksbuddy @barracksbuddy
Effects of Inflation
On consumers : They are worse-off
On producers : better off
On economy : a stable and low rate of inflation is desireable
On borrowers : benefits
On lender : affects adversely
On depositor : as lenders , they too loose out
Measures to control
@barracksbuddy @barracksbuddy
Inflation
RBI : addresses “Demand driven Inflation” Government : addresses “supply side inflation”
by contractionary monetary policy by contractionary fiscal policy
Increasing
Interest rates increased taxes
Sale of securities decreased government
spending
@barracksbuddy @barracksbuddy
Measures to control Inflation
Monetary Measures : inc. in demand can be controlled by -
1. tight monetary policy by RBI
2. OMOs to mop out liquidity
Fiscal measures : prices can be brought down by govt.
1. cut its own spending in schemes
2. increase taxes
Administrative measures : strengthening PDS system to reduce leakage
: ban on export of certain items
: digging out hoarded stocks
@barracksbuddy @barracksbuddy
Inflation Targeting
In India , it is tried to keep inflation under the range :4% 2% since 2015. RBI responsible.
Various steps : High demand due to higher incomes through taxation would be undesirable
and unacceptable
: Addressing inflation due to supply side factors maybe outside the reach of govt. or
may take a long time to be addressed
Immediate Solution : To reduce the demand in economy be making money expensive
If money is costly people would prefer to hold onto dear money , rather
then spend it . Further people would not borrow money to spend as money
is costly. This decreases overall demand, hence prices come down
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