INFLATION
What is Inflation?
Inflation is a general rise in the price Inflation is the decline of purchasing
level in an economy over a period of time. power of a given currency over time.
Inflation indicates how much the average
Inflation is the rate at which the cost of
price has changed for the selected basket
goods and services rises over time.
of goods and services.
Is Inflation all bad?
Impact of Inflation
On Creditors
and Debtors
On Savers and
Investors
On Lending and
Interest Rates
On Salaried and
Pensioners
On Taxpayers
On Exchange
Rate
Understanding Food Inflation
Rural Liquidity Labour Shifting Female
MSP MGNREGA
and Credit to Construction Participation Rate
Understanding Philips Curve
Types of Inflation
Based on the reason Based on the Speed
Demand-Pull Cost-Push Built-in Walking
Inflation Inflation Inflation Inflation
Hyperinflation
Galloping
Inflation
Creeping
Inflation
Othet Types of Inflation
Stagflation Deflation Dis-Inflation Wage Asset Inflation
Inflation
Oil
Gold
Food
Measuring Inflation
Wholesale Price Index (WPI) Consumer Price Index (CPI)
•All •Major •The base
Published by transactions It measures price •It measures
the Office of criticism for year of All- •Base
at the first this index is India WPI has changes from changes over
Economic Adviser, point of bulk Year for
Ministry of that the been revised the perspective of a time in the level
sale in the general CPI is
Commerce and from 2004-05 retail buyer. of retail prices
domestic public does to 2011-12 in
2012.
Industry market are
of selected
not buy 2017. goods and
included. products at
wholesale services on
price. which
consumers of a
defined group
spend their
incomes.
GDP Deflator or WPI or CPI? Both Calculated based on Geometric Mean
WPI CPI
Published By DPIIT (Department for Promotion of Industry and CSO (Central Statistical Office)
Internal Trade)
Base-Year 2011-2012 2012
Components Manufacturing>Primary Articles> Fuel & Power Food, Beverage> Health-Education>Fuel
Goods & Services Excludes Services Includes both Goods and Services
WPI vs CPI vs PPI (Read from link Inflation1&2)
Why is there divergence in CPI and WPI?
Economic Survey 2021-2022
According to the Survey, within the
Major drivers of retail inflation have
miscellaneous group, a subgroup of
been the “miscellaneous” and “fuel &
“transport and Communication”
light” groups. Contribution of
contributed the most, followed by
miscellaneous increased to 35% in
“health”. On the other hand, the
2021-22 (April – December) from
contribution of food & beverages
26.8% in 2020-21 (April – December).
declined from 59% to 31.9%.
Variations The Conceptual Lagging The Price Behaviour Of The
Due To Base Difference In Demand Different Components Of
Effect Their Purpose Pick Up. The Two Indices
What are Headline Inflation and Core Inflation?
Headline inflation refers to the change in value of all goods in the basket.
Core inflation excludes food and fuel items from headline inflation.
Since the prices of fuel and food items tend to fluctuate and create ‘noise’ in inflation
computation, core inflation is less volatile than headline inflation.
In a developed economy, food & fuel account for 10-15% of the household consumption basket
and in developing economies it forms 30-40% of the basket.
Headline inflation is more relevant for developing economies than developed economies.
History of Inflation in India
Why is Inflation high currently?
Global Factors Domestic Factors
Commodity Edible Oil Supply Chain
Oil Tax on Oil
Prices of like (60% of our (Developed:
Prices products is
Metals are requirement) Demand Pull
are high high.
high imported Inflation)
M25. Do you agree with the view that steady
GDP growth and low inflation have left the
Indian economy in good shape? Give reasons in
support of your arguments. (UPSC 2019)
Q1. Which of the following factors can contribute to the supply-side constraints?
1. Higher crude oil prices
2. Infrastructural delays
3. Rupee depreciation
4. Lower agricultural growth
Select the correct answer using the code(s) given below:
(a) Only 1 (b) Only 1 and 2
(c) Only 1, 2 and 3 (d) All of the above
Ans:1)(d)
Match List-I with List-II and select the correct answer using the code(s) given below:
A Boom 1 Business activity at high level with increasing income, output and
employment at macro level
B Recession 2 Gradual fall of income, output and employment with business activity
in a low year.
C Depression 3 Unprecedented level of under employment and unemployment, drastic
fall in income, output and
employment
D Recovery 4 Steady rise in the general level of prices, income, output and
employment.
ABCD
(a) 1 2 3 4
(b) 1 2 4 3
(c) 2 1 4 3
(d) 2 1 3 4
Ans:2)(a)
Q3. Which among the following can result in ‘demand pull inflation’?
1. Increase in subsidy on LPG.
2. Increase in fuel prices.
3. Decrease in income tax rates.
Select the correct answer using the code(s) given below.
(a) Only 1 and 2 (b) Only 1 and 3
(c) Only 2 and 3 (d) All of the above
Ans:3)(b)
Q4. Consider the following statements:
1. The Phillips curve shows that higher rates of inflation imply lower rates of
unemployment.
2. The Laffer curve suggests that government revenues decline beyond a peak tax rate.
3. Gini Coefficient is derived from the Laffer curve.
Which of the statement(s) given above is/are correct?
(a) Only 1 and 2 (b) Only 1 and 3
(c) Only 2 and 3 (d) All of the above
Ans:4)(a)
Q5. A rapid increase in the rate of inflation is sometimes attributed to the “base effect”. What is “base
effect”?
(a) It is the impact of drastic deficiency in supply due to failure of crops
(b) It is the impact of the surge in demand due to rapid economic growth
(c) It is the impact of the price levels of previous year on the calculation of inflation rate
(d) None of the above
Ans:5)(c)
Q6. With reference to economy, the Marginal Utility Curve depicts:
(a) the relation between the satisfaction generated from the consumption of an additional unit of a good
and the quantity of the good consumed.
(b) the inverse relationship between rates of unemployment and corresponding rates of inflation.
(c) the relationship between average tax rates to total tax revenue.
(d) the function relating the quantity purchased of a commodity to the level of money income.
Ans:6)(a)
Q7. Aggregate demand for final goods in an economy is generated though which of the
following?
1. Consumption expenditure
2. Investment expenditure
3. Government expenditure
Select the correct answer using the code(s) given below.
(a) Only 1 and 2 (b) Only 2 and 3
(c) Only 1 (d) All of the above
Ans:7)(d)
Q8. Which of the following statements are correct in case of high inflation?
1. Reduction in the real purchasing power per unit of money.
2. Sustained GDP growth.
3. Growing international trade in the currency.
4. Near zero real interest rate situations.
Select the correct answer using the code given below.
(a) Only 1 (b) Only 1 and 4
(c) Only 1, 2 and 3 (d) Only 2, 3 and 4
Ans:8)(b)
Q9. With reference to economy, the term Inflation Tax refers to
(a) Rise in inflation due to lower taxes.
(b) Higher proportion of wages paid as tax.
(c) Decrease in the value of cash due to inflation.
(d) A tax to penalize short-term currency speculation.
Ans:9)(c)
Q10. The effects of inflation on the price competitiveness of a country's products may be
offset by:
(a) An appreciation of the currency
(b) A revaluation of the currency
(c) A depreciation of the currency
(d) Lower inflation abroad
Ans:10)(c)
Q11. Scarcity of foreign exchange reserves will be witnessed on which type of inflation?
(a) Demand-Pull Inflation
(b) Structural Inflation
(c) Cost-Push Inflation
(d) None of the above
Ans:11)(b)
Characteristics of Structural Inflation includes:
● Food shortage
● Scarcity of resources
● Scarcity of foreign exchange reserves
Characteristics of Cost-Push Inflation includes:
● Increase in wages
● Increase in taxes
● Increase in prices of raw materials
● Supply shocks
Characteristics of Demand-Pull Inflation includes:
● Increasing government expenditure
● Increasing money supply (liberal monetary/ fiscal policy)
● Parallel economy/ black economy
● Increasing forex reserves