INFLATION

CONCEPTS

INFLATIONDEFINATION• GENERAL PRICE

LEVELS INCREASES

• VALUE OF MONEY (PURCHASING POWER OF MONEY ) FALLS

• MONEY CIRCULATION > PRODUCTION

PROBLEMS

• PRICE RISE IS FASTER THAN INCOME

• STANDARD OF LIVING DECLINES

• MAJOR SOCIAL TENSIONS

INTERESTING FACTS

• Hungary:-highest ever inflation,1946

• Argentina:- 3,500 percent,1989,Brazil, 1,200 percent; Peru, 2,500 percent.

• Zimbabwe :-1ooooo percent, September, 2008

• Delhi :- 1998 when the Bharatiya Janata Party (BJP) lost state elections Onion Prices rised

INFLATION EFFECT ON ZIMBABWE

Decreasing value of Money

Worst effect due to Inflation

Hyperinflation:

Is the most extreme inflation phenomenon, with yearly price increases of three-digits percentage points and an explosive acceleration.

Extremely high inflation

It could range anywhere between 50% and 100%. High inflation is a situation of price increase of, say, 30%-50% a year. Both kinds can be stable or dangerously accelerate to enter in an hyperinflation condition.

TYPES OF INFLATION

Contd.

Moderate inflation

It can be differently defined around the world, given the different inflation histories. As an indication only, one could consider an inflation as moderate when it ranges from 5% to 25-30%. For some countries, the higher part of this range is already "high inflation".

Low inflation-

It can be characterized from 1-2% to 5%. Around zero there is no inflation (price stability). Below zero, a country faces deflation

RECENT INFLATION DATA

Data source: www.rbi.gov.in

METHODS OF CALCULATIONWPI CPI

Measure the temporal price change of wholesale transactions of all commodities in the country.

Measures the average price of consumer goods and services purchased by households.

The weights of items have been assigned in proportion to their share in the total value of transaction (output) in the economy

Weights are assigned in proportion to their share in the consumption expenditure of the family of industrial workers in the selected centers

Measures inflation at each stage of production

Measures inflation only at final stage of production.

India, is amongst few countries of the world, which selected WPI as its official scale to measure the inflation in the economy.

Most of the major economies like US, UK, Japan, France, Singapore and even our arch rival China have selected CPI as its official barometer to weigh its inflation

YEAR WISE WPI INDIA

1995-1996

1996-1997

1997-1998

1998-1999

1999-2000

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

0

50

100

150

200

250

121.6 127.2 132.8140.7 145.3

155.7 161.3 166.8175.9

187.3195.6

206.2215.7

WPI

Index

Data source: www.mospi.nic.in

CAUSE OF INFLATION IN INDIA Demand-pull inflation refers to the idea that

the economy actual demands more goods and services than available. This shortage of supply enables sellers to raise prices until an equilibrium is put in place between supply and demand.

The cost-push theory , also known as "supply shock inflation", suggests that shortages or shocks to the available supply of a certain good or product will cause a ripple effect through the economy by raising prices through the supply chain from the producer to the consumer. You can readily see this in oil markets. When OPEC reduces oil supply, prices are artificially driven up and result in higher prices at the pump.

Contd..

Money supply plays a large role in inflationary pressure as well. Low interest rates correspond with a high levels of money supply and allow for more investment in big business and new ideas which eventually leads to unsustainable levels of inflation as cheap money is available.

EFFECTS OF INFLATION

DEBTORS ENTREPRENEURS INVESTORS FARMERS UPPER INCOME

GROUPS

CREDITORS FIXED INCOME

GROUPS CONSUMERS MIDDLE AND

LOWER INCOME GROUPS

BENEFITS LOSES

EFFECT Contd…

As inflation inched towards 12% while the industrial growth nosedived to 3.8 per cent.

CRUDE OIL PRICES AND INFLATION Crude oil inflation

Jan Feb Mar Apr May Jun Jul Aug205

210

215

220

225

230

235

240

245

Series2

INDIA VS CHINA

CURRENT SCENARIO

Indeed, by July 2008, the key Indian Inflation Rate, the Wholesale Price Index, has risen above 11%, its highest rate in 13 years.

This is more than 6% higher than last year, almost three times the RBI’s target of 4.1%.

Hardening of inflation necessitated continuation and reinforcement of monetary policy actions to dampen excessive demand pressures, while providing a conducive environment for continuation of the growth momentum.

REMEDIES

1. Cash Reserve Ratio increased.2. Control over Price of Petrol and Diesel.3. Decreased import tariff.4. Tax increase5. Cement price control.6. Import duty on non-agricultural

products was brought down to 10% from 12.5%

7. Allowed appreciating the Rupee.

TACKLING FOOD PRICE INFLATION The demand-supply mismatches

need to be addressed , Raising crop yields through the use

of modern technology, improved irrigation facilities ,provision of market-based incentive systems for the farmers would help

TACKLING CRUDE OIL ISSUE limiting the adverse impact of higher

international oil prices would require adopting strategies of greater decontrol of petroleum product pricing with targeted subsidies, rationalization of applicable taxes and duties to appropriate levels

CURRENT SCENARIO

Inflation fell sharply to 8.98% in Nov 1st week due to:Fall in prices of fuel,mineral oil as well as manufactured products like steel.

0

2

4

6

8

10

1210.72

8.78

INFLATION RATE

25-Oct 1-Nov

Thank you……