Taslima Akther
What does
“Inflation”
actually mean?
Inflation is the sustained
rise in the general price
level of goods and
services in an economy
over a period of time.
Price vs. Price
Level: What's the
Real Difference?
Price refers to a single price, such as the
price of apples or the price of oranges.
The price level is a weighted average of all
the prices of all the goods and services in
the economy.
Key characteristics of inflation:
1. Reduced Purchasing Power [Link] Price Increase
Top 3 Measures of Inflation
[Link] Price Index Feature CPI PPI GDP Deflator
(CPI) – Tracks the average
change in prices paid by
Measures Consumer prices Wholesale prices Overall prices
consumers for a fixed basket
of
Focus Retail goods Producer costs Economy-wide
goods s services.
Who
Consumers Businesses Entire economy
[Link] Price Index (PPI) Pays?
– Includes Fixed basket Raw materials
All goods/services
Measures inflation at the
wholesale level before reaching
consumers. Excludes Capital good Services Imports
[Link] Deflator – Reflects Use Case Cost of living Business costs
Economic health
price changes across the
entire economy, including
Types of Inflation
Demand-Pull Inflation
Too much money chasing too few
goods.
Cause: Excess demand > Supply
Triggers:
* Central bank overissues money
* Government overspending
* Boom in consumer/business confidence
Effect: Prices rise as output stays limited
Excess spending Limited output Prices rise
Cost-Push Inflation
Cause: Supply shortage due to increased
production cost.
Rising
Costs
Triggers:
Supply Shocks Lower
Profits
Wage Increases
Reduced
Supply Chain Disruptions Supply
Higher
Prices
Core Inflation
Excludes food & energy prices
to reveal long-term trend of price
level by avoiding short-term
volatility
* Avoids temporary price swings
and guides monetary policy to
stabilize prices.
Hyperinflation
Inflation >50% per month (~13,000%
per year)
Effects:
Economic chaos
Production drops
Investment collapses
Barter returns
Causes & Triggers:
Reckless government spending and money
printing
War & Crisis
Weak Institutions
Example: Germany
(1920s)
Redistribution Effects of Inflation
Inflation redistriăutes real income (the purchasing power ofi nominal income). The
effect of
this redistriăution depends on Anticipation.
Helps some people
Unanticipated Hurts others
(unexpected)
Leaves some unaffected
Inflation
Less severe
Anticipated and
(expected) effects can be
eliminated
Fixed income earners
Who is Hurt by
Inflation?
Unanticipated inflation
reduces real income and wealth for
certain groups. Lenders
Affected Groups:
* Fixed-Income Earners –
Pensions & wages lose purchasing
power
* Savers – Cash & low-interest
savings decline in real value Savers
* Creditors (Lenders) – Loans
are repaid with weaker dollars
Who Benefits or
Stays Unaffected 1. Flexible-Income Earners
by Inflation? – Wages & benefits adjust to
inflation (e.g., Social Security,
COLAs, business profits)
2. Property Owners – Higher
rents & asset values outpace
inflation
3. Borrowers – Repay
loans with cheaper
dollars
4. Government – Inflation
reduces real debt burden as
tax
revenues rise
Does Inflation Affect Output? (Flowchart Analysis)
Cost-Push Inflation: Demand-Pull Inflation:
Increase in Prices of Key Resources (e.g., oil) Increased Total Spending
Production Costs Rise
Higher Demand for Goods and Services
Firms Produce Less Output
Firms Produce more Output
Employment Decreases Demand for Labor Increases
(Employment)
Real Output Decreases Real Output increases
Measures To Control Inflation
Inflation in Bangladesh: A Rising Challenge
Inflation in Bangladesh surged to 9.73% in FY 2023-24,
the highest in 12 years.
Inflation Trend
Highest: 10.62% (FY 2011-12)
Lowest: 1.59% (2001)
Key Causes-
Taka Depreciation (35% drop in 2 years)
Global Supply Disruptions (Russia-Ukraine War,
Middle East crisis)
Policy & Market Failures (Delayed interventions,
market distortions)
Proposed Solutions
Stronger Policies – Tighten monetary measures
Market Reforms – Improve regulation & transparency
Support for Poor – Expand social safety nets