1.1Introduction: In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also erosion in the purchasing power of money. A c h i e f m e a s u r e o f p r i c e i n f l a t i o n i s t h e inflation rate, the annu alized percentage change in a general price index (normally the Consumer Price Index) over time. I nf l a t i o n c a n h a v e ma n y ef f ec t s t h a t c a n s i m ul ta n eo us l y h a v e positive and negative effects on an economy. Negative effects of inflation include a decrease in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, or may lead to reductions in investment of productive capital and increase savings in non-producing assets. e.g. selling stocks and buying gold. This can reduce overall economic productivity rates, as the capital required to retool companies becomes more elusive or expensive. High inflation may lead to shortages of good. Consumer begin hoarding out of concern that prices will increase in the future. Positive effects include a mitigation of economic recessions, and debt relief by reducing the real level of debt. Economists generally agree that high rates of inflation and hyper inflation are caused by an excessive growth of the money supply. V i ew s o n w h i ch f a cto r s d et er mi ne l o w to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies s u c h a s d ur i ng scarcities, a s w e l l a s t o g r o w t h i n t h e mo ney s u p pl y . H o w ev er , t he consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Today, most mainstream economists f a v o r a l o w s t e a d y r a t e o f i n f l a t i o n . L o w ( a s opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that aliquidity trappreventsmonetary policyf r o m s ta bi l i z i n g th e e co n o m y . T h e ta s k o f ke ep i ng t he r a te o f i n f l a ti o n l o w a n d s ta bl e i s u s ua l l y g i v e n to monetary authorities .Generally, these monetary authorities are the central banks that control the size of the

money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

1.2 History of inflation: I n f l a t i o n o r i g i n a l l y r e f e r r e d t o i n c r e a s e s i n t h e a mo u n t o f mo n e y i n c i r c u l a t i o n . F o r instance, when gold was used as currency, the government could collect gold coins, melt them down, mix them with other metals such as silver, copper or lead, and reissue the mat the same nominal value. By diluting the gold with other metals, the government could issue more coins without also needing to increase the amount of gold used to make them. Wh e n t h e c o s t o f e a c h c o i n i s l o w e r e d i n t h i s wa y, t h e g o v e r n me n t p r o f i t s f r o m a n increase in seignior age. This practice would increase the money supply but at the same time the relative value of each coin would be lowered. As the relative value of the coins becomes less, consumers would need to give more coins in exchange for the same goods and services as before. These goods and services would experience a price increase as the value of each coin is reduced. From second half of the 15th century to the first half of the 1 7 t h , Western Europe experienced a major inflationary cycle referred to as " price revolution", with prices on average rising perhaps six fold over 150 years. It was thought that this was caused by the increase in wealth of Habsburg Spain, w i t h a l a r g e i n f l u x o f gold and silver from the New World. The spent silver, suddenly spread throughout a previously cash starved Europe, caused widespread inflation. Demographic factors also contributed to upward pressure on prices, with European population growth after depopulation caused by the Black Death pandemic. By the nineteenth century, economists categorized three separate factors that cause a rise or fall in the price of goods: a change in the value or resource costs of the good, a change in the price of money which then was usually a fluctuation in the commodity price of the metallic content in the currency, and currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency. Following the proliferation of private bank note currency printed during the American Civil War , t h e t e r m " i n f l a t i o n " s t a r t e d t o a p p e a r a s a d i r e c t r e f e r e n c e t o t h e currency depreciation t h a t o c c u r r e d a s t h e q u a n t i t y o f r e d e e ma b l e b a n k n o t e s o u t s t r i p p e d

t h e quantity of metal available for their redemption. The term inflation then referred to the devaluation of the currency, and not to a rise in the price of goods. This relationship between the over-supply of bank notes and a resulting depreciation in their value was noted by earlier classical economists such as David Hume and David Ricardo, who would go on to examine and debate to what effect a currency devaluation (later termed monetary inflation) has on the price of goods (later termed price inflation ,and eventually just inflation)

1.3 Inflation in India: India has been the cynosure for the past few years in the global economic arena owing toits changing inflation patterns. Between the fiscal year 200405 and 2007-2008, India had experienced an average growth rate of more than 9%, but the global crunch pinchedthe economy so hard that the economy gave in to the adverse external shocks and fews e c t o r s e x p e r i e n c e d a s l u mp . I n f l a t i o n i n I n d i a 2 0 0 9 s t a n d s a t 1 1 .4 9 % Y- o - Y. Th e i n f l a t i o n r a t e i s r e f e r r e d t o t h e g e n e r a l r i s e i n p r i c e s , t a k i n g i n t o c o n s i d e r a t i o n t h e common man's purchasing power. Inflation is mostly measured in CPI.I n 2 0 0 8 i n d u s t r y bodies, policy makers were all worried with the stea d i l y - mounting inflation. The middle of the year augmented the tension as the majority of t h e p o p u l a t i o n wa s wa r y o f a d o u b l e d i g i t i n f l a t i o n b ut t h i n g s c h a n g e d w i t h i n f e w months. Inflation in India actually fell below 1% during the third week of March, 2009.The moderate inflation is the desirable of all too much of it or too less of it, in every wayworries the policy makers.Understanding in the right manner inflation is such a situation when too many peoplechase too few goods and too few services, which automatically makes the prices of thegoods and services high because of the high demand. At the same time, when inflationfalls below the desired mark (in the negative territory), then too few people chase toomany goods and too many services, making the prices of the goods and services under- priced.The India inflation is actually measured by the Y-o-Y variation in the Wholesale PriceI n d e x . Wh i l e t h e i n f l a t i o n a s me a s u r e d b y WP I i s a t p r e s e n t a t a v e r y l o w l e v e l , t h e inflation measured by the Consumer Price Index is at elevated levels of 9 to 10%.