INFLATION

PRESENTATION BY
GROUP-3 (ROLL 142-150)
PRECISE AND CONCISE
 INTRODUCTION
 It may be one of the most familiar
words in economics. Inflation has
plunged countries into long periods of
instability. Central bankers often
aspire to be known as “inflation
hawks.” Politicians have won
elections with promises to combat
inflation, only to lose power after
failing to do so. Inflation was even
declared Public Enemy No. 1 in the
United States—by President Gerald
Ford in 1974. What, then, is inflation,
and why is it so important?
 MEANING
 The prices of goods and services do not always
stay the same, sometimes it rises and sometimes
it falls. The situation of rising prices of almost all
goods and services is known as inflation.
Generally, inflation is a substantial and rapid rise
in the general price level and thereby a decline in
the purchasing power of money. It is an economic
term that means people must spend more to fill
their gas tank ,buy a gallon of milk, or get a
haircut. Inflation so increase the cost of living.
DEFINITION
Theories of Inflation

 DEMAND PULL INFLATION

 COST PUSH INFLATION
Demand –Pull Inflation
 Demand pull or monetary Theory of Inflation
Demand pull or excess demand Inflation is the traditional and most
common type of inflation . It is a situation in which aggregate demand
at the existing price level far exceed aggregate supply. Goods may be
in short supply because resources are fully utilized or production
cannot be increased rapidly to meet the increasing demand.
In the words of , SHAPIRO ,according to demand pull inflation the
general price level rises because the demand for goods and services
exceed the supply level at existing price.
Cost –Push Inflation

 Cost –Push Inflation also know as wage- Push Inflation, occurs

when overall prices increase due to increases in cost of wages and
raw material. Higher cost of production can decrease the aggregate
supply in the economy. Since the demand for goods hasn’t changed,
the price increases from production are passed onto consumers
creating cost – push Inflation .
Video Representation
Causes of Inflation

DEMAND SIDE
 Increase in money supply
 Increase in disposal income
 Increase in public expenditure
 Increase in consumer spending
 Cheap monetary policy
 Deficit Financing
 Black money
 Increase in export
Causes of Inflation

SUPPLY SIDE
 Shortage of factor of production
 Industrial disputes
 Natural calamities
 Artificial scarcities
 Increase in exports
 Lopsided production
 Law diminishing returns
 International factors
MEASURES To Control Inflation

• Fiscal measure
•Monetary measure
•Other measures
1)Fiscal measure – it refers to the use of government spending and
tax policies to influence economic conditions. These are some
following steps included under this:
a)Increase in taxes
b)Reduction in public expenditure
c) Balanced Budget
2) monetary measure - it is a set of actions to control a nation's overall money
supply and achieve economic growth. Following steps following steps taken
from central bank to control inflation :
a) credit control
b) demonetization of currency.
3.Other measures - The other types of measures are those which aim at
increasing aggregate supply and reducing aggregate demand directly. Some
other measures to controlling the inflation are as follows:
a) increase in production
b) proper investment policy .
Impact of Inflation

1.Inflation Erodes Purchasing Power

This is inflation’s primary and most pervasive effect. An overall rise in
prices over time reduces the purchasing. Power of consumers since a
fixed amount of money will afford progressively less consumption.
2. Inflation Disproportionately Impacts Lower-Income Consumers
Lower-income consumers tend to spend a higher proportion of their
income on necessities than those with higher incomes. This means they
have less of a cushion against the loss of purchasing power inherent in
inflation.
3. Inflation Keeps Deflation at Bay
The Fed’s target inflation rate is set at 2% over the long run. This allows it
to meet its mandates for stable prices and maximum employment. It
focuses on modest inflation rather than steady prices because a slightly
positive inflation rate greases the wheels of commerce, provides a margin
of error in the event inflation is overestimated, and deters deflation. The
overall decline in prices can be much more destabilizing than comparable
inflation.
4. Inflation Feeds on Itself When It’s High
A little inflation can signal a healthy economy. As such, it’s not
something that’s likely to cause inflation expectations to rise. If inflation
was 2% last year and is 2% this year, it’s mostly background noise.
Businesses, workers, and consumers would likely expect inflation to remain
at 2% next year in that scenario.
5. Inflation Raises Interest Rates
As the examples above suggest, governments and central banks have
a powerful incentive to keep inflation in check. The approach has been
to manage inflation using monetary policy over the past century.
6. Inflation Lowers Debt Service Costs
While new borrowers are likely to face higher interest rates when
inflation rises, those with fixed-rate mortgages and other loans get the
benefit of repaying these with inflated money, lowering their debt
service costs after adjusting for inflation.
Conclusion
Thank you!