Contents : A glimpse of what is to come

Meaning and Definitions

Types of Inflation

Causes of Inflation

Effects of Inflation

Control Measures

Present Scenario of Rwandan Economy

Meaning of inflation

In economics, inflation is a rise in the generallevel of prices of goods and services in aneconomy over a period of time. When thegeneral price level rises, each unit of currencybuys fewer goods and services.

In a broad sense, inflation is that state in which the prices of goods and services rise on the one hand and value of money falls on the other.

Definition of Inflation

According to Prof. Samuelson “inflation occurs when general level of prices & cost are rising”.

“Inflation is an increase in the quantity of purchasing power.”– Gregory

Inflation is the stage of too much money chasing too few goods.”-- Coulbourn

Types of Inflation

1. Creeping Inflation

2. Running Inflation

3. Hyper Inflation

1. Creeping Inflation

“When the rise in prices is very low like

that of a snail or creeper, is called Creeping Inflation”

Here the inflation rate is upto 5% The general level of prices rise at a

moderate rate over a long period of time

2. Running Inflation

Running inflation has inflation rate between 8-10 %. A sense of urgency needs to be shown in controlling the running inflation.

Persistent running inflation reduces the savings in the economy and results in slowdown in economic growth.

3. Hyper Inflation Prices rise very fast at double or triple

digit rate. Also called Runway or Galloping Inflations

This type of inflation is witnessed in the past in many countries.

Many Latin American countries like Argentina and Brazil had inflation rates of 50 to 700 percent per year in the 1970s and 1980s.

Many developed and industrialized countries like Italy and Japan also witnessed the hyper inflation in the past.

• 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.

Causes of inflation

There are two main causes for inflation which is stated as below:

• Demand-pull inflation

• Cost-push inflation

Demand Pull Inflation:

The demand for goods and services increases and production

remains the same or does not increase as fast. The excessdemand results in prices being “pulled up”.

Demand pull inflation occurs when total demand for goods and services exceeds the total supply.

This type of inflation happens when there is an inflationary gap

Causes of Demand Pull Inflation :

increase in consumption, perhaps expectations of futureinflation.

increase in investment caused by falling interest rates orexpectations of a booming economy.

increase in government spending or a decrease in taxes,either of which would boost deficit spending.

increase in exports to other nations or a decline in importsfrom other nations.

Demand Pull Inflation Graph

Cost Push Inflation:

• Cost push inflation explains the causes ofinflation origination from the supply side.

• It is caused by an increase in the cost ofproduction. Increased costs “push up” the pricelevel.

• This occurs when costs of production oroperation are increasing.

Cost Push inflation is mainly caused due to the following factors:

increase in wages.

increase in cost of raw materials

increased cost of imported components

(import-push inflation)

Cost Push Inflation Graph

Effects of Inflation

Effect depends on the speed of inflation and the nature of the economy.

– Rising prices of imports

– Lowers national saving

– Redistribution of Income & Wealth

– Collapse of Monetary system

– Adverse impact socially and politically

– Discourages Investment & savings

– Higher Interest / Income tax rates

Control Measures

Measures to control Inflation

• Fiscal Measures

• Monetary Measures

• General Measures

Fiscal measures

Increase in direct taxes.

Increase in indirect taxes.

Reduce government spending.

Introduce measures to increase productivity, e.g. tax rebates and subsidies.

Surplus Budget.

Monetary Policy:

Increase interest rates of banks.

Decrease money supply.

Decrease availability of credit from banks.

Issue of new currency.

Credit Control.

Increase productivity.

Freeze prices and wages.

Implement a wage restraint policy.

Encourage personal savings.

Implement control measures for consumer credit.

Import control: make competing imported goods cheaper.

Introduce price indexation: linking all prices to a particular index, e.g. CPI.

General Measures

Meaning of Inflation Rate

• The inflation rate is a measurement of the risein price of a good or service over a period oftime reflected as a percentage. It is usuallymeasured on a monthly and annual basis.

• The inflation rate is the percentage rate ofchange of a price index over time.

Calculation of Inflation Rate

• The inflation rate is widely calculated bycalculating the movement or change in a priceindex, usually the consumer price index (CPI)

• In order to calculate the inflation rate for anyproduct or service, you will need the price ofthe goods or services for the two periods oftime, then use the following formula tocalculate the inflation rate:

Inflation Rate = ((T2 - T1)/T1) x 100

• Inflation Rate = ((T2 - T1)/T1) x 100

Where

T1 = Price for the first time period or the starting number

T2 = Price for second time period or the ending number

For Example

Let's assume that average price of the 32-inch flatscreen television was $400 last year but is $410 thisyear. What's the annual rate of inflation for 32-inchflat screen televisions?

• Inflation Rate = ((T2 - T1)/T1) x 100

Inflation Rate = ((410-400)/400 x 100

Inflation Rate = (10/400) x 100

Inflation Rate = 0.025 x 100

Inflation Rate = 2.5% increase compare to last year

•

Present Scenario of Rwandan Economy

The inflation rate in Rwanda was recorded at 0.20percent in February of 2015. Inflation Rate in Rwandaaveraged 6.23 percent from 1997 until 2015, reachingan all time high of 28.10 percent in February of 1998and a record low of -15.80 percent in February of 1999.

Actual Previous Highest Lowest Dates Unit Frequency

0.20 0.40 28.10 -15.801997 -2015

percent MonthlyFeb 2009=100

Rwanda Inflation Rate from 1994 - 2014