106 – VYOM GUPTA

108 – TUSHAR JAIN

114 – UTSAAV PAREKH
116 – DEVANG PRAKASH
122 – SHAURYA SHRIVASTAVA
125 – VINIT THANVI
 INFLATION
 DEFINITION (AS A PHENOMENON):
sustained increase in general price level in an economy over a a
period of time
Reduces the worth of money

 When inflation is rising- though some prices may fall, overall cost of living
and cost of business rises as overall prices increase

 We calculate inflation using price

indexes

 Price indexes- weighted averages of

prices of many individual products
 What you as an investor should do!
 Do not keep your money stagnant- always invest something available
for a certain price today may not be available for the same price 10
years from now

 When investing, you have to make sure that the rate of return on your
investment is higher than the rate of inflation-

 Rate of inflation – the rate at which prices of everything goes up over time
increase in the general price level.

 Rate of return - gain or loss on an investment over a specified period,

expressed as a percentage increase over the initial investment cost
 How do we measure inflation in
INDIA?
 Indian government takes WPI as an indicator of the rate of inflation in the
economy

 WHOLESALE PRICE INDEX(WPI)-

the index that is used to measure the change in the average price level
of goods traded in wholesale market

 Was first published in 1902

 One of the more economic indicators available to policy makers
 Replaced by most developed countries by the Consumer Price Index in the
1970s
 In India, a total of 435 commodities data on price level is tracked through
WPI which is an indicator of movement in prices of commodities in all trade
and transactions
 Effects of inflation on market
dynamics?
 Money loses its value – purchasing power of rupee reduces,same

 Amount of rupee will now buy less of the same article

 Uncertainty – between parties in

any transaction in markets

 Redistribution of income(especially hurts those with fixed incomes)

 Hoarding – due to fear of prices rocketting up in future

 Inflation
• money supply increasing faster than the growth rate of the economy
• Different schools of thought :
 Quality theory
- based on the expectation of a seller accepting currency at a later
time for goods which a buyer would wish to buy
 Quantity theory of inflation
- based on the equations of money supply, its velocity and
exchanges
• Most theories combine the above two
 Keynesian Economic View
 Proposes that money is independent of real forces of economy and that
inflation is relut of pressures of economy which express themselves in
prices

 Triangle model – by Robert J. Gordon

 3 major types of inflation

 Demand Pull Inflation - due to increase in aggregate demand due to

increased govt. and private spending

 Cost Pull Inflation or “supply shock inflation” – due to drops in

aggregate supplies due to rise in prices of inputs

 Built-in-inflation (linked to “price/wage spiral”) – due to adaptive

expectations
 Monetaristic view
 Quantity theory of money - Milton friedman

 Inflation is always and everywhere a monetary phenomenon where

too much money is chasing for too few goods
MV = PQ

where,
M = quantity of money in economy
V = velocity of circulation or velocity of money in FINAL
expenditures
P = general price level
Q = index of the real value of FINAL expenditures
 INFLATION IN INDIA
 Current rate of inflation – 12.1 % (Aug 30th,2008)

 Optimal rate of inflation – 4- 5 %

 CAUSES OF CURRENT HIGH INFLATION IN INDIA?

 “Imported Inflation”

 Rise in oil prices globally

 Rise in prices of food products

 Rise in prices of intermediaries

 Rise in oil prices

• Gap is closing between global petroleum demand and supply

• Demand increase mainly from China,stockpiles affected everywhere
• Instability in west Asia
• Attacks on supply chains in Nigeria
• Financial Speculation
 SPECULATION DRIVEN OIL INFLATION
 Price of crude oil today not made
according to any traditional relation
of supply to demand
 Almost 60% of today’s crude oil
price is driven by pure speculation
large trader banks and hedge
funds
 Nymex in New York, ICE Futures
in London, Dubai Mercantile
Exchange (DME), private oil
publication, Platt’s
Process that determines the oil prices is opaque

Few trading banks have any clue in this “paper oil” world

This gives way to speculation

This has given rise to oil prices

 Rise in food prices
 Demand side-
• Rapid global growth
• Voracious demand of fast –
growing countries like CHINA

 Supply side –
• High oil prices
• Govt policies in US,Brazil,Europe
and elsewhere-reduced the
available land for producing food
• Policy neglect in past has led to prolonged agrigarian crisis in
developing world
• Changes in market structure that allow more market speculation
 Rise in prices of metals

 Increased demand from China and other developing nations

 Markets also attracting financial speculators

 Here also there has been a neglect of investment and supply is not
expected to rise very quickly-long gestation period

 Hence, basic imbalance likely to continue for some time

DOMESTIC FACTORS
INFLATION – BOON OR BANE
• Inflation vs growth