Session 6

Inflation and Unemployment

Dr. Sarbjit Singh

Assistant Professor
Economics and Business Environment
Indian Institute of Management Jammu
Jammu, India
ssingh@[Link]
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 Different forms of inflation in an economy and
the ways to measure
Learning
Understanding of unemployment and its
Objectives effects on the economy

Relationship between inflation and

unemployment

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 Agenda Items

 Types of inflation

 Measuring the rate of inflation.

 CPI and WPI

 Unemployment

 Unemployment and Inflation Trade Offs (Philips Curve

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What is Inflation?

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 What is Inflation?
According to Pigou, “Inflation exists when
money income is expanding more than in
proportion to increase in earning activity.”

According to Kemmerer, “Inflation is ... too much

currency in relation to physical volume of
business.”

According to Ackley, “Inflation is a persistent

and appreciable rise in the general level or
average of prices.”

According to Samuelson, “Inflation denotes a

rise in the general level of prices”.
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Types of inflation?

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 Types of Inflation
Creeping Inflation Walking Inflation

Creeping or mild inflation is when prices This strong, or destructive, inflation is

rise 3% a year or less. between 3-10% a year.

This kind of mild inflation makes It is harmful to the economy because it

consumers expect that prices will keep heats-up economic growth too fast.
going up. That boosts demand. People start to buy more than they need
Consumers buy now to beat higher to avoid tomorrow's much higher prices.
future prices. That's how mild inflation
drives economic expansion.

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 Types of Inflation
Galloping Inflation Hyper Inflation

When inflation rises to 10% or more. Hyperinflation is when prices skyrocket

more than 50% a month.
Money loses value so fast that business
and employee income can't keep up with It is very rare. In fact, most examples of
costs and prices. Foreign investors avoid hyperinflation occur when governments
the country, depriving it of needed print money to pay for wars.
capital. The economy becomes unstable,
and government leaders lose credibility. • Germany in the 1920s
Galloping inflation must be prevented at • Zimbabwe in the 2000s
all costs. • Venezuela in the 2010s

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Measurement of Inflation?

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 Measurement of Inflation from Prices
Inflation (Inf) is the rate of change in prices

𝑃𝑡 − 𝑃𝑡−1 𝑃𝑡 : 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑟𝑖𝑐𝑒𝑠

𝐼𝑛𝑓𝑡 = 𝑃𝑡−1 : 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑌𝑒𝑎𝑟 𝑃𝑟𝑖𝑐𝑒𝑠
𝑃𝑡−1

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 Measurement of Inflation from Prices
Inflation (Inf) is the rate of change in prices

𝑃𝑡 − 𝑃𝑡−1 𝑃𝑡 : 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑟𝑖𝑐𝑒𝑠

𝐼𝑛𝑓𝑡 = 𝑃𝑡−1 : 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑌𝑒𝑎𝑟 𝑃𝑟𝑖𝑐𝑒𝑠
𝑃𝑡−1

Today’s price equals last year’s price, adjusted for inflation

𝑃𝑡 = 𝑃𝑡−1 + 𝑃𝑡−1 ∗ 𝐼𝑛𝑓

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 Measurement of Inflation from Prices
Inflation (Inf) is the rate of change in prices

𝑃𝑡 − 𝑃𝑡−1 𝑃𝑡 : 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑟𝑖𝑐𝑒𝑠

𝐼𝑛𝑓𝑡 = 𝑃𝑡−1 : 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑌𝑒𝑎𝑟 𝑃𝑟𝑖𝑐𝑒𝑠
𝑃𝑡−1

Today’s price equals last year’s price, adjusted for inflation

𝑃𝑡 = 𝑃𝑡−1 + 𝑃𝑡−1 ∗ 𝐼𝑛𝑓

If 𝐼𝑛𝑓 > 0 inflation

How to Measure?
If 𝐼𝑛𝑓 < 0 deflation
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 Consumer
Price
Wholesale Index
Price (CPI)
Index
(WPI)

Deflator

Inflation
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Consumer Price Index?

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 Consumer Price Index

The Consumer Price Index (CPI) measures the

overall cost of the goods and services bought by
a typical consumer.

When the CPI rises, the typical family has to

spend more money to maintain the same
standard of living

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Measurement of Inflation

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 Measurement of Inflation
The inflation rate is the percentage change
Compute the inflation
in the price index from the preceding
rate
period

Choose a Base Year and Compute the index by dividing the price of
Compute the Index the basket in one year by the price in the
base year and multiplying by 100
Compute the Basket’s Use the data on prices to calculate the cost
Cost of the basket of goods and services at
different times

Find the Prices Find the prices of each of the goods and
services in the basket for each point in time

Determine what prices are most important

Fix the Basket
to the typical consumer

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CPI

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 CPI/Industrial Workers (CPI-IW)

CPI/Agricultural Laborers (CPI-AL)

CPI/Rural Laborers (CPI-RL)

CPI
CPI-Rural (CPI-R)

CPI-Urban (CPI-U)

CPI-Combined (CPI-C)
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 Labour Bureau,
CPI/Industrial Workers (CPI-IW)

GoI
CPI/Agricultural Laborers (CPI-AL)

CPI/Rural Laborers (CPI-RL)

CPI
CPI-Rural (CPI-R)

National Statistical
Office (NSO),
(MoSPI)
CPI-Urban (CPI-U)

CPI-Combined (CPI-C)
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 CPI-C Basket
(Base = 2012)

Food and beverages

28%
Pan, tobacco and intoxicants
46% Clothing and Footwear
Housing
7% Fuel and light
10% Miscellaneous
7%2%

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 CPI-C (Base 2012=100)
200
180
160
140
120
100
80
60
40
20
0
Jul-19 Aug-19 Oct-19 Dec-19 Jan-20 Mar-20 Apr-20 Jun-20 Aug-20 Sep-20
All Commodities Food Pan, Tobacco & Intoxicants
Clothing & Footwear Housing Fuel & Light
Misc
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 Measurement of Inflation
Pan,
All Clothing & Fuel &
Month Food Tobacco & Housing Misc
Commodities Footwear Light
Intoxicants

Sep-19 145.8 146 166.5 147.9 152.2 139.2 140.7

Sep-20 156.5 161.6 184.5 152.4 156.5 143.2 150.4

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 Measurement of Inflation
Pan,
All Clothing & Fuel &
Month Food Tobacco & Housing Misc
Commodities Footwear Light
Intoxicants

Sep-19 145.8 146 166.5 147.9 152.2 139.2 140.7

Sep-20 156.5 161.6 184.5 152.4 156.5 143.2 150.4

Inflation 7.34 10.68 10.81 3.04 2.83 2.87 6.89

Inflation
All Commodities Food Pan, Tobacco & Intoxicants Clothing & Footwear Housing Fuel & Light Misc
200

150

100

50

0
Sep-19 Sep-20 Inflation
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Wholesale Price Index?

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 Wholesale Price Index
WPI tries to capture the movement of prices in the
economy at the wholesale level

In India
 WPI series is compiled and released by the
Office of the Economic Adviser (OEA),
Department of Industrial Policy and Promotion
(DIPP), Ministry of Commerce and Industry,
Government of India (GoI)
 600 plus items are covered under WPI
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 WPI Basket

23%
Primary Articles
Fuel & Power
13% Manufactured Products
64%

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 WPI (Base 2011-12=100)
180

160

140

120

100

80

60

40

20

0
Jul-19 Aug-19 Oct-19 Dec-19 Jan-20 Mar-20 Apr-20 Jun-20 Aug-20 Sep-20
All Commodities Primary Articles Fuel & Power Manufactured Products Food

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 Measurement of Inflation
All Primary Fuel & Manufactured
Food
Commodities Articles Power Products
Sep-19 121.3 143 100.6 117.9 147.4
Sep-20 122.9 150.3 91 119.8 157.6

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 Measurement of Inflation
All Primary Fuel & Manufactured
Food
Commodities Articles Power Products
Sep-19 121.3 143 100.6 117.9 147.4
Sep-20 122.9 150.3 91 119.8 157.6
Inflation 1.32 5.10 -9.54 1.61 6.92

Inflation
All Commodities Primary Articles Fuel & Power Manufactured Products Food
200

150

100

50

0
Sep-19 Sep-20 Inflation
-50

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 CPI & WPI
180

160

140

120

100
CPI
80 WPI

60

40

20

0
Jul-19 Aug-19 Oct-19 Dec-19 Jan-20 Mar-20 Apr-20 Jun-20 Aug-20 Sep-20

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Effects of Inflation on Different Sections of Society

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 Effects of Inflation on Different Sections of Society
Wage earners: Wage earners gain, if wage rise is greater that price rise and
vice versa.

Producers: In general, producers gain from inflation

Fixed income class: Fixed income classes loses from inflation

Borrowers and lenders: Borrowers gain and lenders lose due to inflation

The government: The government may gain from inflation

© 2019, McGraw Hill Education (India)

Thank You
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