Inflation

Inflation is the rate of increase in prices over a given period of time

If the price of one good has gone up it is not inflation it is inflation only if the price of most goods have gone up and it is taken as price change in average of group of some items

Types of Inflation-

A.General Classification-

i) Creeping Inflation

• It is the earliest stage of inflation and also known as low inflation it is generally considered as helpful for economic development and it varies from  2 to 3% 

ii) Walking inflation

• It is the next stage of inflation after creeping inflation it usually varies from 3 % to 10% it may turn into galloping inflation if not controlled properly.

iii)Galloping inflation-

• It is high inflation which ranges from 10% to 50% this inflation is not beneficial for the economy.

Iv)Hyper inflation

• This form of inflation is largely considered as inflation higher than 50% this inflation is not beneficial to the economy and the value of national currency reduces almost to 0 it also leads to reduction in exports and also leads to to lose people's confidence in the currency.

B.Classification of inflation on the basis of causes

I) Currency inflation

• This type of inflation is caused due to printing of of excess currency notes.

ii) Inflation due to government deficit

• When there is is more expenditure as comparison to the revenue the government may force the central bank to print additional money and which may cause inflation in the market.

iv) Demand pull inflation

This inflation is caused due to to mis-match between the demand and supply in the market and there is is more demand in the market and less production of the goods which causes this type of inflation

The demand may also increase due to

• Increased private and government spending.

• Reduction in the taxes by government.

• Depreciation in local exchange rate.

v) Cost push inflation

• An increase in factor input cost like wages extra pushes up the production prices.

This inflation is also caused by

• Increase in excise and custom duties on raw material that is increase in indirect taxes.

• Increase in labour cost .

• Increase in capital formation .

• Increase in Import of goods.

Vi) Structural inflation

This inflation is caused due to some bottlenecks like-

• Improper agricultural policy.

• Insufficient infrastructure for production -lack of government policies for production side measures .

• Due to other things like accidents, hazard etc.

Vii)Core Inflation-

• Core inflation refers to analysis of inflation data which excludes the more volatile categories like put items and energy products.

• Core inflation was first time used in the financial year 2000-2001.

Causes of Inflation-

1.Decrease in supply-
This is the major cause of inflation when there is decrease of production in the market this decrease can be due to

• Natural calamities.

• Fall in industrial growth.

• Rise in Exports.

• International factors.

• Dip in industrial growth.

2.Demand pull

• When aggregate demand increases due to any reason and supply is unable to meet the increased demand then demand pulls the price up.

Factors affecting demands include

• Increase in money supply.

• Increase in Exports.

• Increase in population etc.

Effects of Inflation-

1.On debtors and creditors

• Inflation benefits the debtors Means borrower and affect the landers means creditors.

2. On landing

• Inflation puts the pressure on lending institutions and this lead to increase in lending.

3. On fixed income groups

• Inflation affect the salaried and pension class.

• To neutralize this negative effect the Indian government provides dearness allowance to its employees.

4.On self employed

• Inflation has neutralizing impact on self employed people in short run but may impact them in long run.

5.On savings-

• Inflation affect the real interest rate on savings and it decreases the marginal propensity to save.

6.On exchange rate-

• Inflation depreciate the local currency due to which it loses it's exchange value in front of foreign currency.

7.On export and import

• Due to gain in in competitive price at world market the volume of export increases and vice versa for import.

8.On economy

• Small amount of inflation in case of India is considered as beneficial but if it increases from certain limit then it is not beneficial for economic development.

Methods to Measure Inflation-

1.Wholesale price index

• w p I measures the change in wholesale price on monthly basis.

• WPI was first published 1942 to in India it is published by department of industrial policy and promotion under Ministry of Commerce and industry it takes into account 697 commodities.Its base year sat at 2011–12 for several years — but as of June 2026, the series has been revised again, now running on a 2022–23 base.

• currently  manufactured products have highest weight age followed by primary articles and then fuel and power in calculation of of w p i.

• Indirect taxes are are not included in WPI calculations.

2. Consumer price index

• It measures the cost of living of any person and it is the change in retail prices on monthly basis.

• It includes both goods and services in it.

It has four subtypes

A.CPI- industrial worker 

• • It has base year of 2016 and its report is published and compiled by Labour Bureau under Ministry of Labour and employment.

B.CPI- agricultural labour

• Its base year is 1986 87 and its report is compiled by Labour Bureau under Ministry of Labour and employment.

C.CPI-Rural labour

• Its base year is 1986 87 and its report is compiled by Labour Bureau under Ministry of Labour and employment.

D.CPI combined

• It is combination of both CPI rural and CPI urban its base year is 2012 .

• It's report is compiled by NSO under Ministry of statistics and programme implementation.

• In April 2014 the RBI has selected the all India CPI as the inflation index to target inflation under new inflation targeting monetary policy framework.

• Under section food and beverages consist of maximum proportion of CPI calculation.

Producers Price Index

• Producer Price Index Measures the price from the perspective of producers.

• It is the average change in price that the producer receives from goods sold by him.

• It takes into account both goods and services.

Housing Price Index

• Housing price index was developed by National housing Bank and published by RBI and it is based on property price transaction in the 10 major cities of India the base year used by RBI for its compilation is 2010-11.

Measures to control Inflation-

1. Fiscal measure

• Decrease in public expenditure - one of the main reason of inflation is excess public expenditure like non development activities expenditure etc.

• It should be cut to to decrease inflation.

2. Monetary measures

• It include selling government securities through open market operation.

• Increasing cash reserve ratio.

• Increasing statuary liquid ratio.

• Increasing bank rate.

• Increasing repo rate and reverse repo rate -using margin requirements properly etc.

3. Administrative measures

It includes

• Increasing the supply of goods and services in case of demand pull inflation -preventing black marketing and prevention of hoarding.

• Following proper commercial policy.

Some Inflation related Terms-

1. Inflationary gap

• It is the excess of total government spending above the national income or can be called as Fiscal Deficit.

2. Deflationary gap

• The shortfall in total spending of government over the national income create diploma tree gap in the economy.

3.Inflation spiral-

• When wages press price up and prices pull wages up is known as inflation spiral this phenomenon is also known as wage price spiral.

4.Inflation premium-

• The bonus brought by inflation to the borrowers is known as inflation premium.

5.Deflation

• It is a decrease in general price level of goods and services throughout an economy in this case inflation can also become negative.

6.Disinflation

• When there is decrease in inflation rate over time but it it remains positive is known as disinflation.

7.Stagflation

• When there is zero economic growth along with inflation then that situation is known as stagflation.

8.Reflation

• When inflation starts returning to its normal condition after a spell of deflation then that phenomenon is known as reflation.

9.Skewflation-

• It occurs when there is inflation in some communities and deflation in others this phenomenon is known as skewflation.

10.GDP deflator-

• It is the ratio between GDP at current prices and GDP at constant prices.

• If GDP deflator equal to 1 then that means there is no change in price level .

• If GDP deflator becomes greater than 1 then there is is rise in price level.

• GDP deflator can be considered as better measure of price change because it covers all goods and services produced in the country.

Inflation Targeting-

• It is a central banking policy that focus on adjusting monetary policy to achieve a specified annual rate of inflation.

Types of Inflation Targeting-

A.Strict Inflation Targeting:

• It is adopted when the central bank is only concerned about keeping inflation as close to a given inflation target as possible.

B.Flexible Inflation Targeting-

• It is adopted when the central bank is to some extent also concerned about other things, for instance, the stability of interest rates, exchange rates, output and employment.

• Urjit Patel committee was appointed by RBI in 2013 to look into this issue.

• The committee recommended for focusing on only one objective that is inflation targeting.

• The committee recommended to adopt CPI combined in calculation of inflation targeting because WPI does not take into consideration the service sector committee also recommended inflation target of 4%( +- 2%).

Important one liner Question and answers on Inflation.

What is inflation?

Inflation is the rate at which prices of goods and services increase over time.

How is inflation measured?

Inflation can be measured using the Wholesale Price Index (WPI) or the Consumer Price Index (CPI).

What is the difference between WPI and CPI?

WPI measures the change in wholesale prices of goods, while CPI measures the change in retail prices of goods and services.

What are the types of inflation?

The types of inflation are creeping inflation, walking inflation, galloping inflation, and hyperinflation.

What is creeping inflation?

Creeping inflation is the earliest stage of inflation, where the rate of increase in prices is low, usually between 2 to 3%.

What is walking inflation?

Walking inflation is the next stage of inflation after creeping inflation, where the rate of increase in prices is usually between 3% to 10%.

What is galloping inflation?

Galloping inflation is high inflation ranging from 10% to 50%, which is not beneficial for the economy.

What is hyperinflation?

Hyperinflation is inflation that is higher than 50% and is not beneficial for the economy.

What is the cause of currency inflation?

Currency inflation is caused by the printing of excess currency notes.

What is the cause of inflation due to government deficit?

Inflation due to government deficit occurs when the government spends more than it earns, leading the central bank to print additional money.

What is demand-pull inflation?

Demand-pull inflation occurs when there is more demand than supply for goods and services in the market.

What is cost-push inflation?

Cost-push inflation occurs when an increase in factor input costs, such as wages, leads to an increase in production prices.

What is structural inflation?

Structural inflation is caused by bottlenecks in the economy, such as an improper agricultural policy or insufficient infrastructure for production.

What is core inflation?

Core inflation is the analysis of inflation data that excludes more volatile categories like food and energy products.

What are the effects of inflation on debtors and creditors?

Inflation benefits debtors, who are borrowers, and harms creditors, who are lenders.

What is the impact of inflation on fixed income groups?

Inflation affects salaried and pension classes, and to neutralize its effect, the government provides dearness allowance to its employees.

How does inflation affect savings?

Inflation decreases the real interest rate on savings and reduces the marginal propensity to save.

How does inflation affect the exchange rate?

Inflation depreciates the local currency, reducing its exchange value in foreign currency.

What are the effects of inflation on exports and imports?

Inflation can increase exports due to competitive pricing, but can decrease imports due to increased cost.

Is a small amount of inflation beneficial for economic development?

A small amount of inflation is considered beneficial for economic development, but excessive inflation is not.