INFLATION ITS CAUSES AND EFFECTS

INTRODUCTION
Inflation is defined as a sustained increase in the price level or a fall in the value of money. It is measured as a rate percentage per unit time, say a year or month. When the level of currency of a country exceeds the level of production, inflation occurs. Value of money depreciates with the occurrence of inflation.

DEFINITION
According to C.CROWTHER, Inflation is

state in which the value of money is falling and the prices are rising.
In economics , the word inflation refers to

general rise in prices measured against a standard level of purchasing power.

RATE OF INFLATION
Rate of inflation is the rate of change of the general

price level. It is measured by simple formula: Rate of inflation t=Pt-Pt-1 Pt-1

Where, Pt=price level in the year t Pt-1=price level in the year t-1,the base year
If there is a decline in the rate of inflation such a

situation is called DISINFLATION.

EFFECTS ON ECONOMY
GENERAL EFFECT NEGATIVE EFFECT POSITIVE EFFECT

GENERAL EFFECT
An increase in the general level of

prices implies a decrease in the purchasing power of the currency.

NEGATIVE EFFECT
High or unpredictable inflation rates are regarded

as harmful to an overall economy.

Negative effects of inflation include a decrease in

the real value of money and other monetary items over time.

POSITIVE EFFECT
Positive effects include a mitigation of economic recession, and debt relief by reducing the real level of debt.

OTHER TERMS .
DISINFLATION the reduction of

rate of inflation .
HYPERINFLATION-an out of control

inflationary spiral .
STAGFLATION high inflation

combined with economic stagnation and unemployment.

TYPES OF INFLATION..
Demand pull Inflation .
Cost push theory .

Pricing power Inflation .

Sectoral Inflation .

DEMAND PULL INFLATION..

It is caused by increases in

aggregate demand due to increased private and government spending.

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Main causes of demand pull inflation

A depreciation of the exchange rate increases the price of

imports and reduces the foreign price of UK exports A reduction in direct or indirect taxation - consumers will have more disposable income causing demand to rise Rapid growth of the money supply as a consequence of increased bank and building society borrowing Rising consumer confidence and an increase in the rate of growth of house prices Faster rates of economic growth in other countries providing a boost to UK exports overseas (an injection of AD)

COST PUSH THEORY..

It is also called supply shock

inflation, is caused by a drop aggregate supply .

This may due to natural disasters ,

or increased prices of inputs..

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Cost Push Inflation

Occurs when costs of production are increasing
Causes: External shocks (commodity price fluctuations) A depreciation in the exchange rate Acceleration in wages Leads to inward shift in SRAS curve Firms raise prices to protect their profit margins better able to do this when market demand is price inelastic Wages often follow prices A rise in inflation can lead to rising inflationary expectations

PRICING POWER INFLATION.

Pricing Power Inflation is more often called as

administered price Inflation.. This type of Inflation occurs when the business houses and industries decide to increase the price of their respective goods and services to increase their profit margins.

SECTORAL INFLATION
The Sectoral Inflation takes place

when there is an increase in the price of the goods and services produced by a certain sector of industries

REASONS OF INFLATION
Lack of balance in the countrys budget. Financial problem, financing the deficit of money by printing. Sudden increase in production costs. Significant increase in the level of energy resources. Faulty structure of the economy . Exported goods far exceeding imported ones. Too many monopolies in the economy. Imported Inflation . Problems with financial planning.

EFFECTS OF INFLATION
They add inefficiencies in the market, and make it

difficult for companies to budget or plan long-term.

Uncertainty about the future purchasing power of

money discourages investment and saving.

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EFFECTS OF INFLATION
There can also be negative impacts to trade from an

increased instability in currency exchange prices caused by unpredictable inflation. Higher income tax rates. Inflation rate in the economy is higher than rates in other countries; this will increase imports and reduce exports, leading to a deficit in the balance of trade.

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EXAMPLE
Increase in the price of wheat
Increase in the price of world oil Increase in the price of rice

Increase in the price of CNG

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MEASURES TO CONTROL INFLATION

MONETARY POLICY FISCAL POLICY OTHER MEASURES

MONETARY POLICY
It aims at reducing money supply in the market.

CREDIT CONTROL ISSUE OF NEW CURRENCY

FISCAL POLICY..
It Majorly pertains to taxation and interest policies .

REDUCTION IN UNNECESSARY EXPENDITURE INCREASE IN TAX INCREASE IN SAVING SURPLUS BUDGET PUBLIC DEBT

OTHER MEASURES
Are those which aim at increasing aggregate

supply addressing aggregate demand directly INCREASE PRODUCTION. RATIONALE WAGE POLICY. PRICE CONTROL. RATIONING.

CONCLUSION
From various monetary , fiscal and other

measures it becomes clear that to control inflation government should adopt all measures simultaneously.
Inflation is like a hydra-headed monster which

should be fought by using all the weapons at the command of the government.

THANKYOU
PRESENTED BY :Poonam