Rahul Sharma , M.B.A. 1(B)
Natasha Goswami, M.B.A. 1(A)
Group Name :- Spark Group
Topic- Inflation
INTRODUCTION
“Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.”
When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.]
Inflation's effects on an economy are various and can be simultaneously positive and negative.
Ø Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future.
Ø Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects.
Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.
DISSCUSSION
Ø Types of inflation on the basis of different causes:-
§ Deficit Inflation:
Deficit inflation takes place due to deficit financing.
§ Credit Inflation:
Credit inflation takes place due to excessive bank credit or money supply in the economy.
§ Scarcity Inflation:
Scarcity inflation occurs due to hoarding. Hoarding is an excess accumulation of basic commodities by unscrupulous traders and black marketers.
§ Pricing Power Inflation :
It is often referred as Administered Price inflation. It occurs when industries and business houses increase the price of their goods and services with an objective to boost their profit margins.
§ Tax Inflation:
Due to rise in indirect taxes, sellers charge high price to the consumers.
§ Wage Inflation:
If the rise in wages in not accompanied by a rise in output, prices rise.
§ Build-In Inflation:
Vicious cycle of Build-in inflation is induced by adaptive expectations of workers or employees who try to keep their wages or salaries high in anticipation of inflation..
§ Development Inflation:
During the process of development of economy, incomes increases, causing an increase in demand and rise in prices.
§ Fiscal Inflation:
It occurs due to excess government expenditure or spending when there is a budget deficit.
§ Foreign Trade Induced Inflation:
It is divided into two categories, viz., (a) Export-Boom Inflation, and (b) Import Price-Hike Inflation.
§ Export-Boom Inflation:
Considerable increase in exports may cause a shortage at home (within exporting country) and results in price rise (within exporting country). This is known as Export-Boom Inflation.
Ø Methods of controlling inflation are-
§ Monetary policy
Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping the federal funds lending rate at a low level; normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum.
§ Fixed exchange rates
Under a fixed exchange rate currency regime, a country's currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency; vis-a-vis the currency it is pegged.
§ Gold standard
Under a gold standard, paper notes are convertible into pre-set, fixed quantities of gold.
The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. The standard specifies how the gold backing would be implemented, including the amount of specie per currency unit.
§ Wage and price controls
Another method attempted in the past has been wage and price controls .Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed
§ Cost-of-living allowance
The real purchasing-power of fixed payments is eroded by inflation unless they are inflation-adjusted to keep their real values constant. In many countries, employment contracts, pension benefits, and government entitlements (such as social security) are tied to a cost-of-living index, typically to the consumer price index.
§ Reduction in Unnecessary Expenditure
The government should reduce unnecessary expenditure on non-development activities in order to curb inflation. This will also put a check on private expenditure which is dependent upon government demand for goods and services.
§ Surplus Budgets
An important measure is to adopt anti-inflationary budgetary policy. For this purpose, the government should give up deficit financing and instead have surplus budgets. It means collecting more in revenues and spending less.
§ Public Debt
At the same time, it should stop repayment of public debt and postpone it to some future date till inflationary pressures are controlled within the economy. Instead, the government should borrow more to reduce money supply with the public. Like the monetary measures, fiscal measures alone cannot help in controlling inflation.
CONCLUSION
India is facing the problem of inflationary pressure because of the increase in Aggregate Demand while Aggregate Supply is respectively constant. The inflationary pressure faced by Indian Economy is due to Demand-Pull inflation i.e. Aggregate Demand > Aggregate Supply. Thus to curb inflation need to fill the gap between Aggregate Demand and Aggregate Supply. For this either need to increase AS or decrease AD that can hamper economic development
These days economies of all countries whether underdeveloped, developing as well developed suffers from inflation. Inflation or persistent rising prices are major problem today in world. Because of many reasons, first, the rate of inflation these years are much high than experienced earlier periods. Second, Inflation in these years coexists with high rate of unemployment, which is a new phenomenon and made it difficult to control inflation.
The government should adopt all measures simultaneously. Inflation is like a hydra-headed monster which should be fought by using all the weapons at the command of the government.
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