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Chapter-1
Inflation
Economy Shield
Video PDF Notes (Lecture-1 to 4)
Introduction lecture Video link for depth understanding https://www.youtube.com/watch?v=nLalHrOba14
Lecture-1 Video link - https://www.youtube.com/watch?v=TEMpQ-u4B6s&t=223s
Lecture-2 Video link https://www.youtube.com/watch?v=ymBRhgO59YI&t=130s
Lecture-3 & 4 – check our Arora IAS YouTube channel
Intro (Meaning of inflation)

• Continuous rise in the price of goods and services

• Decline in purchasing power of the currency
• The particular currency is discontinued
• Lowest – 50 paise for a payment of rs 10
Impact of inflation
Saving

• It affects our savings

• Hurts the poor most
• Not rich becz they have surplus, they can invest and neutralize the impact.
Lender

• To continue their growth

• They have to give interest on deposits as well bcuz , low interest wont attract consumers.
Impact on currency

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General causes – most of the time –

1. global crude prices
2. rupee depreciation
3. higher msp announced By govt
4. breaching fiscal deficit targets
Cause based

• Demand pull inflation

• Cost push inflation
• Structural inflation
Rate based

• Creeping inflation – 4%
• trotting inflation – creeping inflation increases
• Galloping inflation - 8-10%
• Runaway inflation – may change into hyperinflation
• Hyper inflation
Demand pull inflation

Some facts

• This the reason why govt doesn’t produces employment beyond a certain point called NAIRU
(non accelerating inflation rate of unemployment)

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• It also leads to economic growth but it will sustain if it will be productive.

• In developing economies, it is common.
Cost push inflation

Structural inflation

• Due to structural deficiencies

Inflation in india

Measures by govt and rbi

How inflation is controlled in india

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With reference to inflation in India, which of the following statements is correct?

(a) Controlling the inflation in India is the responsibility of the Government of
India only
(b) The Reserve Bank of India has no role in controlling the inflation
(c) Decreased money circulation helps in controlling the inflation
(d) Increased money circulation helps in controlling the inflation
Calculation of inflation

• For calculation of inflation indices are used.

• Two types –
1. Consumer price index
2. Wholesale price index
Which index is used

• Till 2014 wpi was used and it was a centre tool for monetary policy but after the
recommendation of urjit patel committee cpi was used.
Whole sale price index

• Inflation calculated at whole sale level

• Easy to calculate –
• Uniform rate
• Wpi figures calculated and published once in a month by ministry of commerce
• For calculation basket is maintained
• Does not include services
• Modified not more then 10 yrs but not less then 5 yrs
• Last time modified in 2017
• Items can be added and removed
• Formula – lasplyres
• Indirect taxes not added
• Same month of previous year
• Base year -2011 - 12

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Classification of basket

• Primary – milk , vegetables etc

• Secondary – machinery tools
• Fuels and lubricants
• Some items can increase and decrease known as skewflation
Drawbacks

• Consumer – retail level

• Services cant be traced
• Secondary goods overweightage
• During 2013 retail inflation was 10 % , urjit patel committee said in next 12 month – 8% then in
next 12 months – 6% , next – 4% , maintain a +/- 2 range.
Consumer price index

• At retail level
• Difficult to calculate inflation – problem
• Under cpi 4 indices –
1. Cpi(iw) – lb (mol)
2. Cpi(al) – lb(mol)
3. Cpi (rl) – lb(mol)
4. Cpi(unme) – cso (mospi)
• Last 3 are discontinued only iw is published based on 78 different industrial locations.
• Dearness allowances
• 3 new were introduced –
• Cpi (urban) – 310
• Cpi(rural) – 1183(1182)
• Base year – 2011 - 12
Basket

• Food and beverages

• Pan supari and tobaccos
• Housing
• Clothing , footwear
• Fuel lubricants
• Misc.(mostly services like enter)
Which of the following brings out the "Consumer Price Index Number for Industrial Workers ?
a) The Reserve Bank of India
b) The Department of Economic Affairs.
c) The Labour Bureau
d) The Department of Personnel and Training
Some important terms

• Deflation – continuous fall of price

• Either due to excess supply or fall of demand even below supply
(1) Due to low liquidity

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(2) Population
(3) Saturation
(4) unemployment
Disinflation

Reflation

Wpi cpi divergence

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