MACRO ECONOMIC

MANAGEMENT
TOPIC - INFLATION
• MADE BY :

• ESHA BATRA – FB22108

• HARSH KUMAR – FB22078
• RITIKA YADAV – FB22091 • SUBMITTED TO :

• NIKITA VERMA – FB22087

• VISHAL SINGH – FB22117 • DR DEEPTI KAKKAR MA’AM
INTRODUCTION

• Inflation is defined as a sustained increase in the price level or fall in the value
of money .

• When the level of currency of a country exceeds the level of production ,

inflation occurs .

• Value of money depreciates with the occurance of inflation .

DEFINITION

• Inflation is commonly understood as a situation of substantial and general

increase in the level of prices of goods and services in an economy and a
consequent fall in the value of money over a period of time .

• When the general price level rises , value of money falls and as such each unit
of currency buys fewer goods and services . Consequently inflation reflects a
reduction in the purchasing power per unit of money .
TYPES OF INFLATION
DEMAND – PULL INFLATION COST – PUSH
INFLATION
Demand-pull inflation arises when the total demand
for goods and services (i.e. ‘aggregate demand’)
increases to exceed the supply of goods and Cost-push inflation occurs when the total supply of goods and
services in the economy which can be produced (aggregate
Services supply) falls. A fall in
(i.e. aggregate supply is often caused by an increase in the cost of
‘aggregate production. If aggregate
supply’) supply falls but aggregate
that can be demand remains
sustainably unchanged, there is
produced. upward pressure on
The excess prices and inflation
demand puts upward pressure on prices across a – that is, inflation is
broad range of goods and services and ultimately ‘pushed’ higher.
leads to an increase in inflation – that is, it ‘pulls’
inflation higher.
 MONETARY INFLATION

It is a sustained increase in the money

supply of a country ( or currency area ) .
Depending on many factors , especially
public expectations , the fundamental
state and development of the economy ,
and the transmission mechanism , it is
likely to result in price inflation , which is
usually just called “inflation” , which is a
rise in the general level of prices of
goods and services .
 WAGE PUSH INFLATION

Wage push inflation is an overall rise in the

cost of
goods that results from a rise in wages.
Rising wages increases the costs for a firm
and so , these are passed on to the
consumers in the form of higher prices . Also
rising wages give consumer higher
disposable income and therefore cause
increased consumption and aggregate
demand .
 IMPORTED INFLATION

A depreciation in the exchange rate will

make exports more expensive .
Therefore , the prices will increase solely
due to this exchange rate effect . A
depreciation will also make exports
more competitive so will increase
demand . Imported inflation may be
caused by foreign price increases or
depreciation of a country’s exchange
rate .
 HYPERINFLATION

Hyperinflation is a very high and

typically accelerating inflation . It
quickly erodes the real value of the
local currency , as the prices of all the
goods increases . This causes people
to minimize their holdings in that
currency as they usually switch to
more stable foreign currencies , often
the US Dollar .
 CORE INFLATION

Core inflation is the change in the costs of goods

and
services but does not include those from the food
and energy sectors.

Food and energy prices are exempt from this

calculation because their prices can be too volatile
or fluctuate wildly.

Core inflation is important because it's used to

determine the impact of rising prices on consumer
income.
 FAVOURABLE IMPACTS OF INFLATION
• A ) HIGHER PROFITS - inflation usually benefits the producers of products . They experience better profits since
they can sell their products at higher prices .

• B ) BETTER INVESTMENT RETURNS - once the producers receive the right investment , they create more goods
and services . Hence , inflation leads to an increase in the production of product / service .

• C ) MORE EMPLOYMENT AND BETTER INCOME - since production increases , there is an increased demand for
the various factors of production , including manpower . Therefore , employment and income increases during
inflation .

• D ) BENEFITS TO BORROWERS - during inflation , the purchasing power of money decreases . Therefore , if the
borrower is paying a rate of interest which is less than the inflation rate , then he gains in the process . This is
because the real value of the money that the borrower returns is actually less than that of money borrowed .

• E ) HIGHER PRODUCTION – if productive investment grows during inflation , it would lead to higher production of
various goods and services in the economy .
 UNFAVOURABLE IMPACTS OF INFLATION

A ) INEQUALITY IN THE DISTRIBUTION OF INCOME – the profit incomes of businessmen and

entrepreneurs increase during inflation while the real income of common salaried people declines .

B ) LOWER EXPORTS - higher prices of goods means that other countries will find it less attractive to
purchase our goods . This will lead to a decline in exports and lower production and higher
unemployment in our country .

C ) LOWER SAVINGS – inflation encourages consumption instead of saving . Higher prices induce people to
purchase more products now , before they become more expensive . They discourage people from saving
, because money saved for future use will have less value .

D ) FALL IN THE REAL INCOME – real income = money income . Given the money income of the fixed
income groups i.e the salaried class will decrease .
EFFECTS OF INFLATION ON PRODUCTION
AND DISTRIBUTION OF WEALTH
EFFECTS ON PRODUCTION
• Inflation may or may not result in higher output.
• Below the full employment stage , inflation has a favorable effect on production.
• An inflationary situation gives an incentive to businessmen to raise prices of their products so
as to earn higher doses of profit.
• Such a favorable effect of inflation will be temporary if wages and production costs rise very
rapidly.
• Inflationary situation may be associated with the fall in output , particularly if inflation is of
cost – push variety.
• There is no strict relationship between prices and output.
• An increase in aggregate demand will increase both prices and output , but a supply stock will
raise prices and lower output.
EFFECTS ON PRODUCTION

• Adverse effect on capital formation – reduction in savings as cost of living rises – less savings
will lead to less investment and poor capital formation.
• Production distortion – inflation distorts production by diverting resources to the production
of non – essential goods ( higher profit margins ) from essential goods ( lower profit margin ).
• Hoarding and black marketing
• Speculation
• Profit orientation and quality degradation
 EFFECTS OF INFLATION ON
DISTRIBUTION OF WEALTH AND INCOME

• During inflation , usually people experience rise in income.

• Some people gain during inflation at the expense of others.
• Some individuals gain because their incomes rise more rapidly than the prices.
• Some loose because prices rise more rapidly than their incomes during inflation.
• People who invest in shares or bonds will gain more due to higher profits earned by the firms.
• On the other hand, people investing in assets with fixed income ( fixed deposits ) will be in
loss.
 EFFECTS OF INFLATION ON
DISTRIBUTION OF WEALTH AND INCOME

• Farmers benefit from inflation as they would earn more on the products produced. It will also
increase the cost of production but rise in prices is more than the rise in the cost.
• However, the advantage is gained by the rich farmers more than poor farmers.
• Thus , inflation redistributes income in favor of businessmen, debtors and farmers at the
expense of fixed income group, creditors, etc.
 CATEGORIES OF PEOPLE AFFECTED BY
INFLATION
A ) CREDITORS AND DEBTORS
- Borrowers gain and lenders loose during inflation.
- When debts are repaid, their real value declines by the price level and hence , creditors lose.
- The borrower now welcomes inflation since he will have to pay less in real terms than when it
was borrowed.

B ) BOND AND DEBENTURE HOLDERS

- Bondholders earn fixed interest income.
- These people suffer a reduction in real income when the prices rise.
- Beneficiaries from life insurance programs are also hit badly since value of savings degrade.
 CATEGORIES OF PEOPLE AFFECTED BY
INFLATION
C ) INVESTORS
- People who put their money in shares during inflation are expected to gain since the
possibility of earning business profit brightens.
- Higher profits induces owners of firms to distribute profits among investors or shareholders.

D ) SALARIED PEOPLE AND WAGE EARNERS

- Anyone earning a fixed income is damaged by inflation.
- Wage rate increases.
- Inflation results in a reduction in real purchasing power of fixed income earners.
- People earning flexible incomes may gain during inflation.
 CATEGORIES OF PEOPLE AFFECTED BY
INFLATION

E ) PROFIT – EARNERS, SPECULATORS AND BLACK MARKETERS

- Profit – earners gain from inflation.

- Seeing inflation, businessmen raise the prices of their products.
- This results in a bigger profit.
- Speculation dealing in business like essential commodities usually stand to gain by inflation.
- Black-marketers are also benefitted by inflation.
MEASURES TO CONTROL INFLATION
 CONTROL OF INFLATION
1 ) MONETARY POLICY
- Credit control
- Demonetization of currency
- Issue of new currency

2 ) FISCAL POLICY
- Reduction in unnecessary expenditure
- Increase in taxes
- Increase in savings
- Surplus budgets
- Public debt

3 ) OTHER MEASURES
- to increase production
- Rational wage policy
MONETARY POLICY
• Monetary policy refers to policies adopted by
monetary authorities aim at reducing and
absorbing excess supply of money in an
economy . The central bank of the country may
exercise various quantitative and qualitative
techniques of credit control to check inflation .
• Following measures can be taken :
• Restrictions on bank credits by setting higher
cash reserve ratio
• Increasing bank rate and other interest rates .
• Sale of government securities in the open
market by the central bank
• Regulation of consumer credit
• Rationing of credit
FISCAL POLICY
• Fiscal measure to control inflation relates to
government policy with respect to its receipts
and expenditure . The following measures can
be taken :
• Reduction in the volume of public expenditure
• Rise in the level of taxes , introduction of new
taxes and bringing more people under coverage
of taxes .
• More internal borrowings by public authorities
• Postponing the repayment of debt to people .
• Tarrifs should be reduced to increase imports
• Inducing wage earners to buy voluntarily
government bonds and securities
MEASURES OF INFLATION

CONSUMER PRICE INDEX - CPI

PRODUCTION PRICE INDEX - PPI

HOW IS INFLATION MEASURED ?

CONSUMER PRICE INDEX PRODUCER PRICE INDEX

• Pertains to cost of living • Pertains to cost of production
• Basket consists of consumer goods and services • Basket consists of goods only ( no services )
• Capital and intermediate goods are excluded • Capital and intermediate goods included
• Prices include GST • Prices exclude GST
CONSUMER PRICE INDEX

• Consumer price index ( CPI ) measures the change over time in general level of prices of consumer
goods and services that households acquire for the purpose of consumption .

• CPI = CPI new year – CPI base year

--------------------------------------- X 100
CPI base year
PRODUCTION PRICE INDEX
• Producer price index measures the rate of change in prices of products sold as they leave the producer . They
exclude taxes , transport and trade margins that the purchaser may have to pay . PPIs provide measures of
average movements of prices received by the producers of various commodities . It is a measure of inflation at
the wholesale level that is compiled from thousands of indexes measuring producer prices by industry and
product category .

• PPI = CURRENT PRICE OF BASKET

-----------------------------------------
BASE PRICE OF BASKET

Where basket refers to the relative weight of goods and services in the current or base period .
HISTORY OF INFLATION
IN INDIA
 THE 1950S – ALL UNDER CONTROL
• After gaining independence in 1947, for the whole of the 1950s, the inflation remained
subdued – averaging less than 2 per cent.
• However, at the end of the decade, inflation was under control and in the range of 3-7%
 THE 1960S – WAR AND FAMINE EFFECT

• In the 1960s, inflation levels were up and averaged about

6 per cent. 
• India fought two wars – with China (in 1962) and Pakistan
(in 1965) – which resulted in the diversion of government
revenues towards defence as against industrialization or
economic development.
• Also, twin droughts in 1965 and 1966 created severe food
shortages and stoked food inflation. From 1964-67, prices
rose at double-digit rates. By the end of the decade,
however, inflation cooled down and was even negative in
1969 aided by a bumper crop and Green revolution
initiatives.
 THE 1970S – HIGH RISE

The 70s were perhaps the most tumultuous

period in terms of inflationary uncertainty.

And for the first time since independence, 

inflation crossed 20% in 1973-74. Heavy
dependence on oil imports resulted in higher
domestic fuel prices with its spillover effects
on other consumer products. When crude
oil prices cooled, the drought of 1979-80 increased inflation rates.
 THE 1980S – PRINTING MONEY

• The central government’s fiscal deficit – the gap

between the revenues and spends – widened from
3.8 per cent of GDP in the 1970s to 6.8 per cent in
the 1980s. And this fiscal gap was bridged by
printing more currency which in turn added to
demand pressures and inflation.
• Moreover, there were imbalances in the foreign
account with rising current account deficits (more
imports than exports), after international trade was
partially liberalized in the 1980s.
1990S – POST-REFORM EFFECT
■ A severe economic crisis happened
in 1991 triggered by a balance of
payment problem emanating from
an adverse impact of high fiscal
and current account deficits of the
1980s.
■ Inflation continued to be high for a
few years – from 1992-1996 –
when it averaged 9.5 per cent. Later
it came down sharply (5.4 per cent)
over the next decade (1996-2005)
as structural reforms started bearing
fruit. 
THE 2000S AND BEYOND – LOFTY PERSISTENCE
• From 2003 onwards, when the economy started growing
at 7% plus annual rates, inflation inched up.
• Surprisingly, even the 2008 global financial crisis couldn’t
cool off inflation. Between 2008 and
2013, inflation averaged 10.1% p.a due to the rising
global oil and metal prices.
• In 2020, amidst pandemic, inflation increased to 6.6%.
For the month of May 2021, CPI inflation was at 6.3% on
the back of a sharp rise in food, transport and fuel prices.
• The country’s retail inflation, which is measured by the
Consumer Price Index (CPI), dropped to a three-month
low of 6.77% in Oct. 2022. CPI in the month of September
was 7.41% and 7% in Aug 2022.
• Meanwhile, the provisional data on Wholesale price
index (WPI)-based inflation eased to 8.39%, from 10.7%
the month before. Compared to inflation 10 years back,
or in Oct. 2012, CPI is down 2.98% and WPI is up 0.94%.
SITUATION OF INFLATION
IN INDIA
 INFLATION IN INDIA

• Inflation in India There are two indices that are used to measure inflation in India — the consumer price
index (CPI) and the wholesale price index (WPI). These two measure inflation on a monthly basis taking
into account different approaches to calculate the change in prices of goods and services. The study
helps the government and the Reserve Bank of India (RBI) to understand the price change in the market
and thus keep a tab on inflation. June CPI climbed to 7.01% compared with 6.26% last year while WPI
stood at 15.18% vs. 12.07% last year.
FACTORS INFLUENCING INFLATION IN INDIA

A ) Crude Oil Prices: The oil price shock has significantly contributed to the rising inflation in all oil-
importing countries. In recent years, there have been a good number of fluctuations in oil prices, which has
also led to high volatility in the commodity market. The increased inflation rate in April 2022 was primarily
due to the costs of crude petroleum, natural gas, mineral oils, and essential metals. The fuel and light retail
prices increase was 10.80% in April this year compared to 7.52% in March.

B ) Rupee Depreciation: For over a decade, the rupee has depreciated against the US dollar. It has seen a
fall of more than 7% in the last year.
C ) Russia Ukraine War: The retail Inflation rose mainly because of the rising prices of food and other
essential items. India imports a significant portion of sunflower oil from Ukraine, which is the major
exporter of this commodity. Moreover, Ukraine is also a substantial exporter of fertilizers for India. Due to
war situations, uncertainties, and trade cut-offs, there has been a supply shortage in these commodities
instead of a never-ending rise in demand.

How Can the Indian Government Control Inflation?

Being an import-oriented country, India has to purchase (import) raw materials and other goods at a higher
price due to higher dollar value. Importing at a high cost increases the cost of production, leading to higher
costs of the final goods or services, thereby causing Inflation in the Consumer Price Index. The
government uses monetary and fiscal measures to control Inflation.
 STEPS THE INDIAN GOVERNMENT HAS
TAKEN TO
CURB INFLATION
• The RBI has consecutively hiked the repo rates in May and June.
• The rate hike by 0.90% in the two months.
• The RBI is expected to hike it further to control Inflation.
• The government has announced an excise tax cut on petrol and diesel.
• The government will bear a shortfall of INR 1 lakh crore due to the excise duty cut on petrol and
diesel. The government announced a reduction in the import duty on critical raw materials for
production and inputs for the steel and plastic industry—the reduced cost of production, thereby
causing stability in the prices of the final goods.
• The government permitted duty-free imports of 20 lakh tons of crude sunflower oil for the next two
years.
• The government has capped the sugar export and banned wheat exports altogether. It is mainly to
maintain adequate stock and food security within the country and to cool off prices.
SITUATION OF INFLATION IN US
 INFLATION IN THE US

The annual inflation rate in the US

slowed down to 7.7% in October, the lowest
since January, and below forecasts of 8%.
It compares with 8.2% in September.
Energy cost increased 17.6%, below 19.8% in
September, due to gasoline (17.5% vs 18.2%)
and electricity (14.1% vs 15.5%). A slowdown
was also seen in food (10.9% vs 11.2%) and
used cars and trucks (2% vs 7.2%). On the
other hand, prices for shelter (6.9% vs 6.6%)
and fuel oil (68.5% vs 58.1%) increased faster.
 CURRENT SITUATION
The US economy has recovered quickly from
the pandemic but the bounce back in demand
has stressed supply chains and caused inflation
to rise sharply. The economy is expected to slow,
as the Federal Reserve (the Fed) continues to
tighten monetary policy and COVID economic
relief programs come to an end, bringing core
Personal Consumption Expenditure (PCE)
inflation down to the Fed’s 2 percent
medium-term target by late 2023. However, if
inflation is more persistent than expected, the Fed
will need to tighten more, which will further
slow the economy.
• Impact: The IMF’s annual review of the US economy focuses on the policies needed to return inflation
to the Fed’s medium-term target. Most workers’ wages have failed to keep up with inflation, degrading
the purchasing power of households and causing significant hardship. Although increases in gasoline
and food prices have been affected by global events, the prices of a broader range of items have also
risen strongly, including housing and transportation.

• Measures taken: The Fed increased its policy rates by 1.5 percent so far this year and is likely to
increase them by another 2 or 2.5 percent in the coming months. It is also unwinding its holdings of
Treasury bonds and mortgage-backed securities. As a result, the cost of borrowing has significantly
increased. For example, the average fixed rate on a 30-year mortgage has already risen from 3 percent
to between 5 and 6 percent since the start of this year.
• Risks: US economic developments will be impacted by global factors, such as the Russian
war with Ukraine, the ongoing pandemic, and possible recurrence of shutdowns in China.
Also, the longer inflation stays high, the bigger the risk that inflation expectations move
up, which then feeds back into wages and prices.

• Future Prospects: To support growth over the medium to long term, the US government
can use fiscal measures to invest in reforms to expand the size of the labor force, improve
productivity, and encourage innovation and investment. These could include increased
government support for paid family leave, childcare, pre-school, and access to a college
education; tax credits that help women, minorities, and lower-income workers join the
workforce; and immigration reform that is targeted toward expanding the labor force and
strengthening skills.
THANKYOU