INFLATION

ECONOMICS
CONTENTS
 What is inflation?
 Who controls inflation in India?
 Important facets/keywords of the definition
 Effects of inflation
 Causes of inflation
 > Demand-pull Inflation
 > Cost-push Inflation
What is inflation ?
• Inflation is generally defined as the process of persistent and appreciable
rise in general price levels
To reframe it in simpler words:
 Inflation is the rise in the general level of prices of goods and services in an
economy over a period of time.
 Inflation is measured in percentage.
 The opposite of inflation, i.e. the fall of prices of goods and services is
called deflation
Who measures and controls inflation in India?

 In India , the ministry of statistics and programme implementation measures

inflation in India.
 The country’s central bank that is the Reserve Bank of India (RBI) works to
limit inflation through its monetary policies.
Important facets about the definition :

 Inflation refers to a process of rising in prices and not a state of high prices.
Inflation basically measures the average price rise over a period of time.
 Inflation refers to a situation of appreciable or considerable rise
prices.
 Economists believed that some inflation is necessary for economic growth however beyond a
limit, inflation hurts both economic and consumers growth.
Important facets about the definition :

 Rise in price should be prolonged in order to be called as inflationary price

rise.
 The process of rise of price should be something that is continued over a long period of time.
 Inflation is measured as the rate of increase in the price level as indicated by
the price index such as consumer price index (CPI) and wholesale price index
(WPI).
 CPI and WPI respectively measure retail level and wholesale level price changes. CPI measures the
rise in prices for goods and services like food, medical care, education etc which consumers buy for
end use. WPI captures goods or services sold by businesses to smaller businesses for selling further.
Effects of Inflation:

 Purchasing power of currency fall as goods and services get costlier.

 When inflation is high then the cost of living gets higher as well. If inflation
goes beyond an unreasonable level, it will hurt the economic growth.
 Though a certain level of inflation is required for the economy :
 To promote expenditure
 To encourage the production of goods and services
 To demotivate hoarding of money.
Causes of Inflation in the economy:

 Demand – Pull Inflation

 Cost – Push Inflation
Demand – Pull Inflation
 It is the inflation originating from the demand forces.
 Demand-pull inflation occurs when the demand for goods and services exceeds
the supply available at the existing price, i.e., when there is excess demand in
goods and services.
 For example : If there is a high demand of tomatoes and many people want to
buy tomatoes but there is a limited supply of it, then the price of the tomatoes
will rise.
Cost – Push Inflation
 Cost – Push inflation refers to inflationary rise in prices which arise due to its
increase in costs.
 Cost-push inflation occurs when overall prices increase (inflation) due to
increase in the cost of wages and raw materials or caused by increase in wage
cost and increase in the profit margin.
 For example : the rise in price of shampoos is due to the increase of price in the
chemicals used in making them. This is called cost – push inflation
 THANK YOU !