inflation copy (2)

8/2/2019 Inflation Copy (2)

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How does Inflation

affect the economy..?

Presented by: INDRESH.N

SHRIKANTH.K.A


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Inflation

Inflation means a persistent rise in the price levels ofcommodities and services, leading to a fall in thecurrencys purchasing power.

Inflation can be defined as a rise in the general pricelevel and therefore a fall in the value of money.

In layman terms: Inflation is cutting money intohalf without damaging the paper.


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How to Measure Inflation

Inflation is measured by calculating the percentage

rate of change of a price index, which is called theinflation rate.

This rate is calculated by mainly two different priceindices:

1. Wholesale price index2. Consumer price index


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Consumer price index

CPI is a measure of a weighted average of prices of aspecified set of goods and services purchased byconsumers.

It is a price index that tracks the prices of a specifiedbasket of consumer goods and services, providing ameasure of inflation.

Most developed countries uses this index.


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Wholesale price index

WPI is the index that is used to measure the changein the average price level of goods traded inwholesale market.

India uses the WPI to calculate and then decide theinflation rate in the economy.

WPI does not properly measure the exact price rise anend-consumer will experience because, as the namesuggests, it is at the wholesale level.


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Causes Of Inflation

Demand- pull theory

Cost-push theory

Tax rise


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Effects of inflationA high rate of inflation can cause the following

economic impediments:The value of investments are destroyed over time.

Inflation changes the allocation of income

Non-uniform inflation can lead to heavy competitionin the global market and threaten the existence of

small economies.

High levels of inflation tend to lead to economicstagnation.


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On business community: Inflation is welcomed by entrepreneurs andbusinessmen because they stand to profit by rising prices. They find that thevalue of their inventories and stock of goods is rising in money terms. They alsofind that prices are rising faster than the costs of production, so that their profit isgreatly enhanced.

Fixed Income Groups: Inflation hits wage-earners and salaried people very hard.Although wage- earners, by the grace of trade unions, can chase gallopingprices, they seldom win the race. Since wages do not rise at the same rate as

the general price level, the cost of living index rises, and the real income of thewage earner decreases.

Farmers: Farmers usually gain during inflation, because they can get betterprices for their harvest during inflation

Effects of Inflation


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Contd..

Investors: Those who invest in debentures and fixed-interest bearing securities,bonds, etc, lose during inflation. However, investors in equities benefit becausemore dividend is yielded on account of high profit made by joint-stock companiesduring inflation.

Inflation will lead to deterioration of gross domestic savings and less capitalformation in the economy and less long term economic growth rate of the economy.


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Inflation in the India


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Year Inflation rate (max.consumer prices) Percent Change Date of Information2003 5.40% 2002 est.2004 3.80% -29.63% 2003 est.2005 4.20% 10.53% 2004 est.2006 4.20% 0.00% 2005 est.2007 5.30% 26.19% 2006 est.2008 6.40% 20.75% 2007 est.2009 8.30% 29.69% 2008 est.2010 10.90% 31.33% 2009 est.2011 11.70% 7.34% 2010 est.


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Major Highlights

In 2009-10, increase in inflation was due to factors likefood inflation hike. (Supply shortage of cereals, pulses,wheat, and rice due to drought in country)

In 2010-11, high inflation is attributed to increasedprices of fruits and vegetables (due to increase in

demand) and increase in commodity prices e.g. crudeoil.


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Measures to control inflation

The central banks, monetary authorities or finance ministries ofmost nations have the authority to take economic measures tocontrol rising inflation by regulating the following factors:

Increasing the central bank interest rates and increasing bankinterest rates.

Regulating fixed exchange rates of the domestic currency.

Controlling prices and wages.

Providing cost of living allowance to citizens in order to createdemand in the market.


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Conclusion

Inflation continues posing a threat

Inflation has been caused by rapid growth

Fall in oil prices and higher interest rates will lead to reduction in inflation

Challenges for Indian Economy in 2011

Getting inflation under control

Spreading the growth benefits more equitably.

Completing investment projects that are essential for the long termdevelopment of economy.

Dealing with global financial uncertainty that will make the capital flowsand exports more difficult.


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