Inflation

Inflation

THE HANS INDIA |   Oct 12,2017 , 11:41 PM IST

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Inflation is raise in the prices of the commodities.it is a sustained increase in the general price level. 

Types of Inflation on the basis of causes

There are various types of inflation and the main two types of inflation are

1) cost push inflation ; 2)demand pull inflation
Cost-push inflation results from general increases in the costs of the factors of production. These factors—which include capital, land, labor and entrepreneurship—are the necessary inputs required to produce goods and services. When the cost of these factors rise, producers wishing to retain their profit margins must increase the price of their goods and services. Demand-pull inflation results from an excess of aggregate demand relative to aggregate supply. For example, consider a popular product where demand for the product outstrips supply. The price of the product would increase.

Types of Inflation on the basis  of Speed and Intensity
1.Creeping inflation or low inflation-it is the situation where the inflation is less than 3%,it's actually beneficial to economic growth.
2.Walking Inflation-inflation is between 3-10% a year. It is harmful to the economy because it heats up economic growth too fast. People start to buy more than they need, just to avoid tomorrow's much higher prices.
3.Running or galloping inflation-in this situation there will be a very high inflation running in the range of double digits i.e greater than 10%, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can't keep up with costs and prices.
4.Hyperinflation-Hyperinflation is when the prices skyrocket more than 50%,It happens in a very short span of time.
5.Skewflation- In this inflation there will be a raise in the prices of one or small group of commodities over a period of time
6.Headline Inflation: it is a measure of total inflation within an economy including the commodities such as food and energy prices which tend to be much volatile and prone to inflationary spike .
7.Stagflation: it is a situation where the economy growth is stagnant  but there is price inflation.
8.Disinflation: it is basically decrease in the prices inflation rate compared to the previous months  rates and the inflation is still existing.
9.Deflation: Deflation is the opposite of inflation, it's when prices fall.

Measures of inflation
There are two indices which are used to measure the inflation

1)wholesale price index
2)consumer price index

1.Wholesale price index (WPI):

  • Wholesale price index takes into account of the prices of goods at wholesale level
  • It does not include services
  • The base year for calculation of WPI is 2004-05
  • It is published on weekly and monthly basis by Dept of Industrial policy and promotion(DIPP) under Ministry of commerce and industry
  • There are three categories in the WPI
  • Primary articles(mainly food items)-has 20% weightage
  • Fuel and power-has 15% weightage
  • Manufacturing-has 65% weightage
  • The annual rate of inflation, based on monthly WPI, stood at 0.79% (provisional) for the month of May, 2016 (over May,2015) as compared to 0.34% (provisional) for the previous month and -2.20% during the corresponding month of theprevious year.
2.Consumer price index (CPI):

  • It takes into account of the prices of goods as well as services at retail level
  • The base year for calculation of CPI is 2011-12
  • It is published on12th of every month by The Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation.
  • There are three types of CPI’s CPI(urban),CPI(rural),CPI(urban&rural)
  • Consumer prices in India increased 5.76 percent year-on-year in May of 2016, higher than an upwardly revised 5.47 percent rise in the previous month
Causes for inflation:
Inflation is caused by a combination of four factors.
1.Increasing supply of money.
2. Decreasing/lack of supply of goods.
3. Decreasing Demand for money
4. Demand for goods goes up

Impact of inflation: 
Inflation seemed to be a chronic problem in many parts of the world. There is a wide spread recognition that inflation results in inefficient resource allocation and hence reduces potential economic growth. Inflation imposes high cost on economies and societies; disproportionately hurts the poor and fixed income groups and creates uncertainty throughout the economy and undermines macroeconomic stability.

High inflation has always penalized the poor more than the rich because the poor are less able to protect themselves against the consequences, and less able to hedge against the risks that high inflation poses. Lowering inflation therefore, directly benefits the low and fixed income groups.

1. Distract future plans: Inflation has an impact on our plans for the future. When saving for retirement, college, a house, or simply budgeting for the next 12 months, the cost of goods and services have a direct impact on your goals. Due to inflation, your goals may cost more in the future than today. A meal that costs $10 today may cost $10.36 in one year. A car that costs $10,000 today may cost $10,359 in one year, and almost $12,000 in only 5 years.
So, when planning for the future, you must consider inflation and the effect it may have on your goals.

2. Real wages of employees: Many people dislike inflation because they feel it makes it easier for the government, employers, financial institutions, and others to deceive them. One of the most important things about inflation is that the confusion caused by price changes enables people to play tricks on employees, at their expense.” Thus, some employers may “forget” to raise their employees’ wages as much as inflation thereby giving them a real pay cut. There is evidence that people do get fooled, at least initially, about their real wages. People seem to base their sense of satisfaction on nominal earnings rather than real earnings.

3. Paying higher taxes:  Inflation creates other opportunities for sophisticated institutions to unfairly take advantage of the average individual, in many people’s minds. Inflation can increase the complexity of evaluating financial assets, from CDs and insurance policies to stocks and bonds. This shifts the distribution of power in the financial marketplace to the more sophisticated and knowledgeable actors to the detriment of the average person, in this view. Thus, the government might “forget” to change the tax brackets after an inflationary episode, so the average person would end up paying higher taxes

4. Distorting investments:  Economists tend to emphasize that inflation can do economic damage by distorting investment and consumption decisions. Distortions results from households’ and businesses’ uncertainty about inflation’s future course. When inflation is stable, people are more likely to have roughly the same anticipation of its future level. When inflation is highly volatile, however, people have different guesses. Most turn out to be wrong. Inadvertently, some end up winners and other losers.

Inflation and its impact on the common man in india
Inflation is above 9% mark from last year. This has hit budgets of salaried middle class in the country. Inflation has hit the common man in so many ways, as follows;     ·

  • Purchasing power of the rupee falls- a  Rs.  50 note, which could use to buy a kilogram of rice, will now fetch only half a kilogram ·
  • Commodity wholesaler dealers, such as rice dealers’ at mandis, may try and hoard essential commodities like food grains on hopes of reaping profits when prices increase further on dwindling supplies ·
  • Fixed income groups will be hit the hardest because their salaries will not be revised to include the cost of living even as prices of items soar ·
  • Household as well as national savings drop because there is less money to save now as people use a greater part of their disposable income to pay for daily-use commodities ·
  • Retail investors owning stocks of inflation-sensitive companies such as automobiles are likely to see the stock prices fall on low sales as people prefer to not spend money on “luxury” items, sticking instead to the “necessities ·
  • Food and dairy products which are of daily use are rising above 12%. For a middle class person it constitutes about 30-40% of his monthly spends. Such an impact leave him very less money for other activities. ·
  • Impact on EMI-With inflation being on high almost all banks have increased rates by 1-2% on existing borrowers of  home loan. As home loans are mostly taken at floating rates most customers have to pay more emi per month from last 1-2 years.
  • Petrol Prices-The Petrol or diesel prices have been increased so many times this year that travel or commuting budget has increased for most of the middle class. ·
  • Credit Card  usage- As customers are short of cash, more customers are using credit cards and getting into a debt trap. To pay these  card dues they then take personal loan if the shortfall becomes higher thus one more EMI to pay.
Measures to control inflation:
1. Monetary policy: It is the most important tool for maintaining low inflation.  Increased interest rates will help reduce the growth of Aggregate Demand in the economy. The slower growth will then lead to lower inflation. Higher interest rates reduce consumer spending Increased interest rates increase the cost of borrowing, discouraging consumers from borrowing and spending.

2. Supply side policies: Supply side policies aim to increase long term competitiveness and productivity.. Therefore, in the long run supply side policies can help reduce inflationary pressures.

3. Fiscal Policy: this is another demand side policy, similar in effect to Monetary Policy. To reduce inflationary pressures the government can increase tax and reduce government spending. This will reduce AD.

4. Exchange Rate Policy: It was felt that by keeping the value of the pound high, it would help reduce inflationary pressures.

5. Wage Control: Wage growth is a key factor in determining inflation. If wages increase quickly it will cause high inflation. In the 1970s, there was a brief attempt at wage controls which tried to limit wage growth. However, it was effectively dropped because it was difficult to widely enforce.



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