INFLATION

“By inflation we mean a time of generally

rising prices.”
: SAMUELSON
“Inflation is simply a persistent and
appreciable rise in general price – level.”
: SHAPIRO
 KEYNESIAN VIEW OF
INFLATION
♦ Semi – Inflation:- Increase in the quantity
of money before full employment leads to
increase in output and employment. And is
also known as BOTTLENECK
INFLATION.
♦ Open or Full Inflation:- Increase in the
quantity of money after full employment
leads to rise in the price – level which is
called open, full, true or absolute.
 OPEN INFLATION

N
Full employment
P2
P1 Price Line
Output Prices Q2 E
Q
Q1
Full
Semi-
Inflation
Inflation

o M1 M2 F
M3 M4

Money Supply
 TYPES
 Basis of the degree of government
control
 Basis of political conditions
 Basis of rate of inflation
 Basis of scope
 According to process
BASIS OF THE DEGREE OF GOVERNMENT CONTROL

SUPPRESSED
OPEN INFLATION
INFLATION
 OPEN INFLATION

It is a process in which prices are

allowed to rise without any attempt on
the part of the government control.
Prices continue to rise according to
demand & supply conditions.
 SUPPRESSED
INFLATION

It refers to a situation in which rising

prices are checked by
administrative measures like
rationing, price control etc. by
government.
 BASIS OF POLITICAL CONDITIONS

WAR TIME POST WAR PEACE TIME

INFLATION INFLATION INFLATION
 WAR TIME
INFLATION
In order to meet war expenses government increases
the supply of money. Large proportion of
production is bought by government itself.
Relatively small proportion of production is
available to the people. As result prices begin to
shoot up. Thus inflation that takes place during the
course of war is called war time inflation.
 POST WAR
INFLATION
Tendency of inflation persists even after the
war mainly due to 2 reasons. Firstly,
government has to spend large amounts on
repair & reconstruction of damaged
property. secondly, taxes levied during war
are abolished & loans taken from public are
repaid.
 PEACE TIME
INFLATION
Underdeveloped countries need large
resources for economic planning &
development programmes. In order to
mobilize resources, government has to
resort to deficit financing. It leads to rise in
prices which is popularly known as peace
time inflation.
 BASIS OF RATE OF INFLATION

HYPER
CREEPING WALKING RUNNING
INFLATION
INFLATION INFLATION INFLATION
 CREEPING
INFLATION
It refers to that inflation wherein prices
rise very slowly. It is not only
beneficial to economy but is also
considered essential. Some economists
are of the view that 3% rise in prices
can be called creeping inflation.
 WALKING
INFLATION
When price rise becomes intense &
quantum of inflation gains momentum
or when prices rise between 30 & 40%
is called walking inflation.
RUNNING/GALLOPING
INFLATION
When there is rapid increase in prices in
very short period is called running
inflation. In this case, inflation rate is
between 80 & 100% over a decade.
Such an inflation has an adverse
impact on middle or poor classes.
 HYPER INFLATION
It refers to a situation when prices rise at
an unexpected rate. There is an
escalation of price rise. It is called
Hydra-headed Monster of inflation. It
puts the entire economy out of gear.
 BASIS OF SCOPE

SECTORAL COMPREHENSIVE
INFLATION INFLATION
SECTORAL/SPORADIC
INFLATION
When inflation affects only a particular
part of the country or covers only one
or two goods like pulses, petrol etc. it
is called sporadic inflation.
COMPREHENSIVE
INFLATION
When inflation is not confined to a given
part of the country or a few goods, but
engulfs the entire economy and all
goods, then it is called comprehensive
inflation.
 ACCORDING TO PROCESS

WAGE INDUCED PROFIT INDUCED DEFICIT INDUCED STAGFLATION

INFLATION INFLATION INFLATION
WAGE INDUCED
INFLATION
Powerful labour organizations have strong
bargaining power vis-à-vis employers. They
succeed in getting their wages increased.
This results in to higher cost of production
& increased prices. Such a rise in prices is
called wage induced inflation.
PROFIT INDUCED
INFLATION
In developed countries big companies while fixing
the price of their commodities add a given
percentage of profit to the costs. This act is called
mark-up. These companies keep the mark-up quite
high. Consequently commodities prices rise very
high & inflation takes place. Such an inflation is
called mark-up or profit induced inflation.
DEFICIT INDUCED
INFLATION
Such an inflation is the outcome of
deficit financing by the government. It
takes place due to increase in money
supply in the wake of deficit financing,
without any corresponding increase in
the supply of goods & services.
STAGFLATION

It involves inflationary rise in prices &

wages at the same time that people are
unable to find jobs & firms are unable
to find customers for what their plants
can produce.
CAUSES OF
STAGFLATION
1) Restricted supply of labour.
2) Increase in indirect taxes.
3) Global increase in prices of essential
raw materials.
4) Increase in money wages.
 MEASURES TO
CONTROL
STAGFLATION
1) Anti-inflationary income policy.
2) Adjustment of prices of different
industries.
3) Reduction in the marginal tax rates.
4) Manpower policies.
THEORIES OF
INFLATION
 Demand pull inflation theory

 Cost pull inflation theory

CAUSES OF INFLATION
Inflation is an outcome of an imbalance in demand
for & supply of goods. when demand exceeds
supply or cost rises then inflation takes place.
Thus causes of inflation have 2 sides:

1. Demand side
2. Supply side
 CAUSES RELATED TO
DEMAND
 Increase in public expenditure
 Increase in disposable income
 Black money
 Increase in investment
 Reduction in taxes
 Increase in population
 Increase in exports
CAUSES RELATED TO
SUPPLY
Artificial scarcity
Taxation policy of the government
Shortage of food grains
Industrial disputes
Technical changes
Lack of raw materials
Natural calamities
War
Less production
EFFECTS OF INFLATION
Effect on investors
Effect on fixed salaried class
Effect on producers
Effect on agriculturists
Effect on middle class
Effect on savings
Effect on employment
Effect on balance of payments
Effect on banks and insurance
companies
Effect on taxes
 ECONOMIC
DEVELOPMENT:A
CONTROVERSY
1) Inflation has a favourable effect on
economic development or inflation
promotes development.
2) Adverse effect of inflation on economic
development or inflation is a retarding
factor.
MEASURES TO
CONTROL INFLATION
1) Monetary Measures
2) Fiscal Measures
3) Other Measures