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Understanding Inflation: Types and Impacts

This document discusses various aspects of inflation including its causes and effects. It defines inflation as a rise in the general price level and identifies two main types: demand-pull inflation which can result from increases in money supply, government purchases, or exports, and cost-push inflation caused by higher wage or input costs. Hyperinflation is extreme, rapid inflation where prices rise so quickly the concept of inflation loses meaning. Stagflation refers to high inflation combined with slow growth and high unemployment. The document also examines various indexes used to measure inflation in India including the WPI, CPI, PPI, and SPI. It outlines economic impacts like redistribution of income and wealth as well as costs like shoe leather effects, menu costs

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Rashmi Vaishya
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8 views15 pages

Understanding Inflation: Types and Impacts

This document discusses various aspects of inflation including its causes and effects. It defines inflation as a rise in the general price level and identifies two main types: demand-pull inflation which can result from increases in money supply, government purchases, or exports, and cost-push inflation caused by higher wage or input costs. Hyperinflation is extreme, rapid inflation where prices rise so quickly the concept of inflation loses meaning. Stagflation refers to high inflation combined with slow growth and high unemployment. The document also examines various indexes used to measure inflation in India including the WPI, CPI, PPI, and SPI. It outlines economic impacts like redistribution of income and wealth as well as costs like shoe leather effects, menu costs

Uploaded by

Rashmi Vaishya
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

INFLATION

POOJA MOHAN
02
PGDBM(HR)

Inflation

This is the process by which the


price level rises and money loses
value.
There are two kinds of inflation:
a) Demand pull
b) Cost push

Demand pull inflation


Demand

pull inflation may be due

to :
a)Increase in money supply
b)Increase in government purchases
c) Increase in exports

Cost push Inflation


Cost push inflation may arise
because of :
a) Increase in money wage rates
b) Increase in money prices of raw
materials.

Hyper inflation
Extremely

rapid or out of control inflation.


There is no precise numerical definition to
hyperinflation.
Price increases are so out of control that the
concept of inflation is meaningless.
The most famous example of hyperinflation
occurred in Germany between January 1922
and November 1923.
By some estimates, the average price level
increased by a factor of 20 billion!

Stagflation
A condition of slow economic growth and relatively
high unemployment accompanied by inflation.
This happened to a great extent during the 1970s,
when world oil prices rose dramatically, fueling
sharp inflation in developed countries.
At least some central banks have expressed
concern over inflation even as the global economy
seems to be slowing down.

How is inflation
measured?
WPI

(Wholesale Price Index)


India- the only major country that uses
WPI (1st published in 1902)
What is WPI?
The WPI number is a weekly measure of
wholesale price movement for the
economy

Consumer Price Index (CPI)


A

measure of the average price of


consumer goods and services purchased by
households (1st published in 1970)
CPI indicates the change in the purchasing
power of the consumer
CPI for Industrial Workers (CPI-IW),
CPI for Agricultural Labourers / Rural
Labourers (CPI -AL/RL),
CPI for Urban Non-Manual Employees (CPIUNME)
Published on a monthly basis

Producer

Price Index (PPI)

Measures

average changes in prices received by


domestic producers for their output

Service
The

Price Index (SPI)

share of the service sector in the (GDP) gone


up from 28% (1950) to over 50%
Necessitates representation of Services in the
price index

The Economic Impacts of Inflation


Redistribution

of Income and wealth


among different groups
Distortion in relative prices and outputs
of different goods, or sometimes in
output and employment for the
economy as a whole.

THE COSTS OF INFLATION


Shoe

leather costs
Menu costs
Tax distortions
Confusion and inconvenience
Arbitrary redistribution of wealth

leather
costs are the
resources wasted
Shoe
leather
costs

Shoe

when inflation encourages people to reduce their


money holdings.
Inflation reduces the real value of money, so
people have an incentive to minimize their cash
holdings.
Less cash requires more frequent trips to the
bank to withdraw money from interest-bearing
accounts.

Menu costs
Menu

costs are the costs of adjusting


prices.
During inflationary times, it is necessary
to update price lists and other posted
prices.
This is a resource-consuming process
that takes away from other productive
activities.

Inflation-Induced Tax
Distortion
The

income tax treats the nominal


interest earned on savings as income,
even though part of the nominal interest
rate merely compensates for inflation.
The after-tax real interest rate falls,
making saving less attractive.

Taming Inflation
Monetary policy- Bank rate policies, Open Market operations,
Reserve requirement ratios
Fiscal policy-taxation, public borrowing, public expenditure
Direct Control-Fixing ceiling prices of the products, Rationing.
Miscellaneous methods-Controlling
Wages, Controlling population growth

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