SOCIETAL PROJECT

ON

“Price Inflation”

Submitted by
Mr. Rakesh k
(1BO22BA016)
Under the Guidance of
Mrs. Suma K G
Professor
Dept. of Management Studies
Brindavan College of Engineering
Banglore – 560063

To
VISVESVARAYA TECHNOLOGICAL UNIVERSITY, BELGAUM
In partial fulfillment of the requirement for the award of the Degree in Master
of Business Administration

Department of Management Studies

Brindavan College of Engineering
Banglore-560063 (Karnataka)
JULY – 2023

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 Table of contents

SI.NO PARTICULAR PAGE NO.

1 Introduction 3

2 Review of literature 4-6

3 Analysis and discussion 7-9

4 Outcome 10-13

5 Conclusion 14
6 References 15

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 INTRODUCTION

In economics, inflation is an increase in the general price level of goods and services in an economy.
When the general price level rises, each unit of currency buys fewer goods and services; consequently,
inflation corresponds to a reduction in the purchasing power of money. The opposite of inflation is
deflation, a decrease in the general price level of goods and services. The common measure of inflation
is the inflation rate, the annualized percentage change in a general price index. As prices faced by
households do not all increase at the same rate, the consumer price index (CPI) is often used for this
purpose. The employment cost index is also used for wages in the United States. There is disagreement
among economists as to the causes of inflation. Low or moderate inflation is widely attributed to
fluctuations in real demand for goods and services or changes in available supplies such as during
scarcities. Moderate inflation affects economies in both positive and negative ways. The negative effects
would include an increase in the opportunity cost of holding money, uncertainty over future inflation,
which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as
consumers begin hoarding out of concern that prices will increase in the future. Positive effects include
reducing unemployment due to nominal wage rigidity allowing the central bank greater freedom in
carrying out monetary policy, encouraging loans and investment instead of money hoarding, and
avoiding the inefficiencies associated with deflation. Today, most[weasel words] economists favour a
low and steady rate of inflation.Low (as opposed to zero or negative) inflation reduces the probability of
economic recessions by enabling the labor market to adjust more quickly in a downturn and reduces the
risk that a liquidity trap prevents monetary policy from stabilizing the economy, while avoiding the
costs associated with high inflation. The task of keeping the rate of inflation low and stable is usually
given to monetary authorities. Generally, these monetary authorities are the central banks that control
monetary policy through the setting of interest rates, by carrying out open market operations and (more
rarely) changing commercial bank reserve requirements.

REVIEW OF LITERATURE:

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 1.Author: Marta Dos Reis Castilho
Department of the main findings of the literature review rely on studying the implications of inflation
expectations in various sectors of the economy, since many articles studied the role of economic agents’
expectations in different areas. Important economic agents, such as large corporations and financial
groups, are not the only ones that can generate expectations potentially altering the course of some
economic variables. Households proved to be as influential as other agents. Expectations are constructed
to be boundedly rational, in which agents rationally make decisions expecting to obtain the best utility
outcome for them. Their future beliefs are built the same way as in the past, which is still a critical
driver of these expectations management.

2.Author: Foluso A. Akinsola

The aim of this study was to review the existing literature on the relationship be-tween inflation
and economic growth, highlighting both the theoretical frame work and empirical evidence. This
review is different from other reviews in that it critically evaluates the impact of inflation on
economic growth in developed and developing countries. To our knowledge, this may be the first
review of its kind to survey the existing research in detail on the dynamic relationship between
inflation and economic growth in both developed and developing countries. The findings from the
studies reviewed in this paper show that the impact of inflation on economic growth varies from
country to country and over time. The study also found that the results from these studies depend
on country-specific characteristics, the data set used, and the methodology employed. On balance,
the study found over whelming support in favour of a negative relationship between inflation and
growth, especially in developed economies. However, there is still a great deal of controversy
about the specific threshold level of inflation that is appropriate for growth.

3.Author: Yueyun (Bill)Chen

Using economic theories, it explains how the equilibrium price of a product or service is
determined based on its demand and supply, how its price may be changed associated with shifts
of demand and supply curves and thus there a price rising or falling. Then it describes the demand-
pull and supply-push inflation and explains what caused the current sharp inflation in the US and
world. The paper theoretically and empirically discusses the relationship of inflation with

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economic growth, unemployment, international trade, the interest rate, and the exchange rate, and
explores the effects of inflation on individuals and investments. The government inflation
targeting and its effectiveness are also reviewed. Finally, it examines the recent accelerating
inflation and possible solutions. Latest data from the US and world are added in the analysis to
support relevant conclusions and the correlations of some variables from the US are calculated and
significance tests are conducted.

4.Author: Dr SKS Yadav:

The study was carried out on the analysis of the facts and the figures showed that the rate of
inflation, and the economy are two sides of the same coin, in the future. Studies have shown that
the main cause of inflation is the inflation of food prices, which is in October of 2020, 11.07%,
core inflation-5.64%, which was the highest rate in the past 30 years. Inflation is a major influence
on the lives of the middle class and the poor class. The control of the rate of inflation is required to
be a strong, powerful, and long-term policy of the government. The rate of inflation in general and
food inflation, in particular, has been a persistent problem in India over the past few years. The
pandemic has caused both demand and supply shock. Due to pandemic both wholesale and retail
inflation continued to increase. The major reason behind the inflation rise in India is the sharp rise
in the commodity prices. The Government should take protective measures in order to ensure the
country's security of supply in order to stimulate the economy and keep the production costs low.
The conduct of monetary policy is the main tool for maintaining low inflation rate. Rising interest
rates, contribute to the reduction of the growth rate of aggregate demand in the economy. The
slower growth of aggregate demand will reduce the rate of inflation. The supply policy aimed at
the improvement of the long-term competitiveness and productivity. That is why, in the long term,
the policy may help to reduce the inflationary pressure. Fiscal policy and demand-side policies are
similar, in essence, to make the conduct of monetary policy. To reduce inflationary pressures, the
government can increase taxes and decrease government spending.

5. National Bureau of Economics research:

Leading macroeconomics textbooks explain inflation with a Phillips curve in which the inflation
rate depends on expected inflation, the level of output relative to trend, and supply shocks.
Typically, the models assume that expected inflation is determined by lags of the inflation rate,
and that supply shocks are largely changes in the relative prices of food and energy. One-time

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supply shocks can have persistent effects because they feed into expectations. In this framework, a
central bank can guide inflation to a desired level, but if inflation starts above this level it is costly
to reduce it, and it can also be costly to offset supply shocks and prevent them from raising
inflation.

Objectives:
The main objective of inflation is to determine the price effect on the commodities and services
in economics. Deferent types of inflation measures are used to measure the price effect of different
types of goods and services. The GDP deflator is used to calculate inflation in GDP, the consumer
price index is used to measure inflation in household goods and services, and the wholesale price
index is used to calculate the retail market commodities at retail market prices. These different
types of measures help to understand the price effect on different types of sectors. That makes it
easier for the government to make policies accordingly. The study of inflation also helps in price
control of commodities and services in the economy. It helps to provide the real GDP and
production data, the real value of money, and help to manage the interest rate in the economy.

ANALYSIS AND DISCUSSION

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 PROBLEMS: -
1.Reduced purchasing power:
Inflation erodes the purchasing power of money. When prices rise, the same amount of money
buys fewer goods and services. This can lead to a decline in the standard of living, especially for
people with fixed incomes or those who are unable to negotiate higher wages.

2.Wage price Spiral:

Inflation can trigger a wage-price spiral, where workers demand higher wages to keep up with
rising prices, and businesses pass those higher costs onto consumers in the form of higher prices.
This cycle can become self-reinforcing and lead to even higher inflation rates.

3.Uncertainty reduced investment:

High inflation creates uncertainty about future prices, making it difficult for businesses and
individuals to plan for the future. This uncertainty can discourage investment and economic
growth as businesses hesitate to make long-term commitments or borrow money at high interest
rates.

4.Distored resource allocation:

Inflation can distort the allocation of resources in the economy. When prices are rising rapidly,
consumers may rush to purchase goods and services, leading to excessive demand for certain
products. This can result in imbalances in supply and demand, shortages, and the misallocation of
resources.

5.Reduced savings and investment:

Reduced savings and investment: Inflation discourages saving because the value of money
decreases over time. When people expect prices to rise, they are more likely to spend their money
or invest in assets that can preserve value, such as real estate or commodities. This reduced
savings and investment can hinder long-term economic growth and stability.

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 SOLUTIONS:

1.Monetary Policy:
Central banks can use monetary policy tools, such as interest rate adjustments, to control inflation.
By increasing interest rates, the central bank can reduce consumer spending and investment, which
can help cool down an overheating economy and reduce price pressures.

2.Fiscal Policy:
Governments can use fiscal policy measures to manage inflation. For example, they can increase
taxes or reduce government spending to reduce aggregate demand in the economy, thereby
curbing inflationary pressures.

3.Supply-side Policies:
Governments can implement supply-side policies aimed at increasing the production of goods and
services. This can include measures such as investing in infrastructure, reducing regulatory
burdens, providing incentives for businesses to invest and expand, and promoting research

4.Wage Policies:
Controlling wage growth can help manage inflation. Governments, in consultation with labour
unions and employers, can implement policies that promote moderate wage increases in line with
productivity growth. This helps prevent excessive wage-push inflation, where rising labour costs
lead to higher prices for goods and services.
5.Exchange Rate Management:
Countries with flexible exchange rates can use exchange rate policy as a tool to manage inflation.
A depreciation of the currency can make imports more expensive, leading to higher prices for
imported goods. Conversely, a strengthening currency can reduce import prices and help contain
inflationary pressures.

6.Price Controls:
In some cases, governments may impose price controls on certain essential goods and services to
prevent excessive price increases. However, price controls are often seen as a temporary and
imperfect solution, as they can lead to shortages, black markets, and disincentives for producers.

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 7.Inflation Targeting:
Central banks can adopt inflation targeting frameworks, where they set a specific inflation target
and use monetary policy tools to achieve it. This provides a clear signal to businesses and
households about the central bank's commitment to price stability

OUTCOMES:
“Survey on understanding public perception and awareness of “Price inflation”
Chart A: Age

Chart B: Have you noticed any changes in prices of goods and services over the past year?

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Chart C: How concern about are you about the impact of price inflation on your personal finances?

Chart D: What sources do you rely on to stay informed about price inflation?

Chart E: How do you describe the overall trend in prices over the past year?

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Chart F: What factors do you believe are contributing to change n prices?

Chart G: Have you made any changes to your spending habits or financial planning as a result of price
inflation?

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 Chart H : Have you made any changes to your spending habits or financial planning as a result of price
inflation?

Chart I: Do you think price inflation is a temporary phenomenon or a long-term trend?

Chart J: Do you feel adequately informed about the causes and impact of price inflation?

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 CONCLUSION:
Price inflation refers to the sustained increase in the general level of prices for goods and services
in an economy over a period of time. It is typically measured by the Consumer Price Index (CPI)
or other similar indices.

The causes of price inflation can vary, but they often include factors such as increased demand,
supply chain disruptions, rising production costs, changes in government policies, and monetary
factors such as excessive money supply or currency devaluation.

Price inflation can have both positive and negative effects on an economy. On the positive side,
moderate inflation can encourage spending and investment, stimulate economic growth, and
reduce the real burden of debt. However, high or unpredictable inflation can erode purchasing
power, reduce consumer and business confidence, distort price signals, and create economic
instability.

Central banks and governments typically aim to maintain stable and low inflation rates to promote
price stability and overall economic health. They use various tools, such as monetary policy and
fiscal measures, to control inflation and maintain price stability.

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It is important to note that the conclusion regarding price inflation can vary depending on the
specific economic conditions, policies, and factors at play in a particular country or region.
Therefore, ongoing monitoring, analysis, and appropriate policy responses are crucial to
effectively manage inflation and its potential impact on the economy and society.

REFERENCES

1.NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue, Cambridge

2.Dr. S.K.S. Yadav,1Associate Professor Faculty of commerce and Business Administration

Meerut College, C.C.S. University, U.P., India

3.FOLUSO A. AKINSOLA, NICHOLAS M. ODHIAMBO

Professor in Macroeconomic Policy Analysis, College of Economics and Management
Sciences, University of South Africa,

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