[Link].
com
INFLATION DEFINITIONS
INFLATION - Persistent increase in price level
- Reduction in rate of inflation
- Without any adverse impact on national income output
DISINFLATION - Price level increases but at lower rate
- Desirable to some extent
- Persistent decrease in price level
- inflation rate becomes negative
- Opposite to inflation
A
DEFLATION - Price level reduces - Profit decreases
-
R
Fall in output, employment etc.
- Leads to recession - not desirable
ST
- Inflation returns after spell of deflation
A
REFLATION - Price level increases along with increase in output
- During phase of economic recovery
S H
IA
- Aggregate Demand > Productive Capacity of an Economy
INFLATIONARY - Productive Capacity = Aggregate Supply @ Full Employment
-
D
GAP It is potential inflation
- Price increase - production cannot beyond certain point
DEFLATIONARY
GAP IN -
-
-
-
Aggregate Demand (AD) < Aggregate Supply (AS)
@ Full capacity
It leads to deflation and recession
Ex. Great Depression 1929
- Situation during boom -
OVERHEATING - Further increase in AD fails to increase real output
OF ECONOMY - Extra demand leads to inflation
- AKA Repressed inflation - Government intervention
- Refers to situation in which AD > AS
SUPPRESSED - But govt prevents price level from rising
INFLATION - Via direct price control measure - price regulation, ceiling price
- Hidden inflation
- Price increases without any price suppressive measure
OPEN - Persistent increase in price level
INFLATION - Government or monetary authorities (ex RBI) do not intervene
- But government always try to control inflation
[Link]
[Link]
STRUCTURAL - Caused because of structural deficiency of economy
INFLATION - ex. Infrastructural bottlenecks
- Stagnation and inflation occurs simultaneously
STAGFLATION - Stagnation = zero economic growth
- Unemployment (recession) + Unemployment
- Inflation rate + Unemployment rate
MISERY INDEX - Usually in developed countries
PHILLIPS
A
- Inverse relationship between Inflation and Unemployment
CURVE
T R
Stagflation is situation. Misery index is index and Phillips curve is
hypothesis
AS
H
• Based on prices of only non volatile commodity
CORE • Excludes volatile commodities ex. food and crude oil
S
INFLATION • Used to show trend of inflation
IA
• Difficult to reduce for government (based on stable items)
D
- Based on prices of all groups/ types of commodities
- Actual inflation expressed in WPI or CPI
N
HEADLINE -
I
Includes food and crude oil in consumption basket
INFLATION - Urjit Patel Committee recommended to target headline
inflation for monetary policy.
AGRIFLATION - based on food
SKEWFLATION - Uneven increase in price level
• mildest form of inflation
CREEPING • rate varies between 2 - 3%.
INFLATION • Continued creeping inflation is good for economy.
• This inflation is manageable.
WALKING/ • Moderate
TROTTING • Rate varies between 3-10%.
INFLATION • Warning for the occurrence of galloping inflation.
[Link]
[Link]
• AKA Hopping, Galloping inflation
RUNNING
• The rate of inflation exceeds the rate of production
INFLATION
• From 10% to 50%.
• AKA Hyper inflation
• Cause: Printing of money
• Out of control inflation.
RUNAWAY
• Hyperinflation is over 100% per year.
• Money no more function as store of value.
• Barter trade emerges.
-
-
For common interest of public
Ex. Defence, Administration
R A
T
PUBLIC GOOD - Nobody cannot be excluded
-
S
Non rejectable
- Non rivalry in consumption
-
-
H A
The inverse relationship inflation and unemployment
If Inflation decreases unemployment increases
S
PHILLIPS CURVE - Price stability has a trade off against employment.
-
IA
Some level of inflation could be considered desirable
- In order to minimise unemployment.
LITTLE
INFLATION IS
N D - Inflation and growth go hand in hand (directly proportional)
- Inflation if unchecked can result into hyperinflation (not good)
I
GOOD - Most economist agree that small amount of inflation is good
- Low income groups are hurt the most
HIGH INFLATION - Pensioners and students who get fixed income also get hurt
CAN HURT THE - Instability and uncertainty
ECONOMY - Discourages savings thus investment
- Fiscal deficit may go up
- Monetary policy
- Central bank sets a specific inflation rate as its goal
- New Zealand was the first country to adopt it
INFLATION - Committee headed by Urjit Patel recommended -
TARGETING • Inflation Targeting based on CPI
- Flexible inflation target to be set by GOI once in every 5 year
- It will be official goal of RBI
- The target being set is 4% with a +/- 2% band.
[Link]
[Link]
- Inflation does not measure price it measures change in price
- Desired goods are put together into market basket
HOW INFLATION - Cost of this basket is then compared over time
IS MEASURED - Price index calculates change in price of that market basket
- Base is last year, but base year is different concept
- Year on the basis of which inflation is computed
- It gives percentage change in prices
BASE YEAR - The base year has to be revised periodically. Why?
- To reflect the structural changes within an economy
- Year with less monsoon deficit
-
A
Year with no major natural calamity, drought or famine
CRITERIA FOR - Year with no alarming rates of inflation
R
SELECTING - Year with no instability in terms of economic activity
BASE YEAR
T
- Year with adequate data
- WPI 2011-12 = 100
AS
S H
D IA
I N
[Link]
[Link]
• It shows the general role of inflation in the economy
• Wholesale prices of selected good (not services) from selected
market
• Goods cost cheaper in wholesale market than retail shops
• WPI takes into account 697 commodities
WHOLESALE
• It is constructed/ estimated by the office of economic advisor
PRICE INDEX
• Department for promotion of industry and internal trade (DPIIT)
• Not affected by any change in the fiscal policy
• Estimated at monthly intervals (till 2009 it was weekly)
• Indirect taxes are not included (Since 2017)
• WPI food index was introduced (in 2017)
R
• POINT TO POINT METHOD= (WPI current - WPI base ) / WPI base
A
T
METHOD OF ◦ Base year is 2011-12 but base is different concept
S
ESTIMATING • 52 Week Average:
INFLATION ◦ Average of point to point inflation
A
◦ During previous 12 months
S H
IA
No of Items Weightage
Primary Articles 117 23%
N D
Fuel and Power 16 13%
I
Manufactured Items 564 64%
TOTAL 697 100%
• Criteria for fixation of weightage: Share in total production
• Engel's Law: % of income spend on food decreases with increase in income
[Link]
[Link]
• Unlike WPI, CPI deals with retail prices which affect everyones
pocket
• Takes into account the price rise of commodities used directly by
CONSUMER consumers
PRICE • Shows impact of inflation on people and change in cost of living
INDEX • CPI measures the change in retail prices on monthly basis
• Since 2014, used for monetary policy formulation
• Estimated at monthly interval
A
• Constructed for the four groups of consumers
T R
S
CPI IW • Food - 46%, Clothing, Pan, Supari, Car, AC
H A
S
[Link] Statistics Office introduced 3 new CPIs
IA
1. CPI Rural
2. CPI Urban
3. CPI combined
D
NEW CPI [Link] year 2012
N
[Link] selection of items and their weightage were made on monthly
I
consumption expenditure data of 68 round (2011-12) of NSSO
[Link]-C: 2012 = 100
[Link]- C: 2020 = 157.3
[Link]
[Link]
• AKA Implicit Price Deflator
• Ratio between GDP @current and GDP @constant prices
GDP DEFLATOR • That is nominal GDP upon real GDP
• If GDP deflator is 1, it implies no change in general price levels
• GDP Deflator > 1 -- General increase in price levels
• Measures the change in the prices/ cost till stage of production
• It does not include cost incurred in distribution stage
• ex. middlemen, transport, trader etc.
• Excludes the effect of indirect taxes on inflation
• Takes into account both goods and services
A
PRODUCER
• IMF has recommended the use of PPI instead of WPI
PRICE INDEX
R
• BN Goldar Committee recommended shift from WPI to PPI
(experimental basis)
T
• Producer --> Wholesaler --> Retailer
S
• Helps in identification price increase in each stage so steps
can be taken
NHB RESIDEX
H A
• To calculate the price rise in housing sector
S
• By National Housing Bank
D IA
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I N
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