INFLATION

Inflation

- It is a situation characterized by a gradual, sustained, unchecked rise in price level observed over a period of time which generates expectations of a further rise.

-  Hyper inflation is a situation in which there is a fast rise in general price level even to the extent that it may rise each day leading to short fall in value of money.

People lose faith in domestic currency.

Govt shifts to some hard currency as an alternate currency, also called galloping Inflation.

-  Stagflation is a situation in which inflation coexists with recession, unemployment and business permission.

-  Recession is a situation characterized by declining demand, declining investment and business permission.

-  Demand pull inflation refers to general rise in price level due to rise in demand of goods and services.

This can be due to 

                                      Increase in wages and income.

                                      Increase in population  

                                      FDI, FII, NRI investment, earnings of exporters

                                      Increase in black money.

                                      Increase in govt. expenditure.

-  Cost push Inflation refers to general rise in prices level when there is increase in overall cost of production, distribution etc. or a shortfall in supply of goods and services in general.

This can be due to

                                      Infrastructural bottlenecks

                                      Rise in administered prices that are arbitrarily determined by government rather than market forces.

                                      Hoarding speculation and black marketing.

                                      Increase in international prices, which are beyond government’s control.

-  Core Inflation/ Underlying inflation is inflation based on factors which are within preview of policy makers and excludes factors over which has not control.

Control of Inflation:

-  Monetary Measures: implies quantitative and qualitative credit control tools adopted by RBI to control inflation. eg CRR, Repo, Reverse Repo etc.

-  Fiscal Measures: Reduction in import duty.

-  Administrative Measures:

                                           Control of anti-black marketing and hoarding act.

                                           Essential services maintenance act 1955

                                           Strengthening PDS.

Consequences of Inflation

-  Production Pattern goes out of line with demand. Therefore there is mis allocation of resources.

-  Capital resources shift from long term to short term use. (High inflation benefits business and everybody wants to cash in now).

-  If inflation in non-essential goods then production shifts from essential to non-essential goods).

-  Inflation may lead to like in price of goods so much that demand of goods may decline. This leads to recession.

-  It reduces purchasing power of the people. While some people gain from inflation, fixed income earners lose from it, leading to inequality in society.

-  Inflation breeds corruption, black-marketing, speculation etc.

-  Because of ↑in prices of inputs, exports become uncompetitive.

Paint to Paint Inflation means inflation during a certain week ending last year as compared to corresponding week ending current year.

TAGS:Inflation,galloping Inflation,Stagflation,Hyper inflation,Recession,Cost push Inflation,Control of Inflation,Consequences of Inflation,