Inflation
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Transcript of Inflation
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Inflation
Definition, types and causes of inflation
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Areas to focus on
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What Is Inflation?• Inflation is an increase in the average level of prices, not a
change in any specific price.• Inflation is a phenomenon whereby general price level rises
persistently. • According to Prof. Crowther,• “Inflation is a state in which the value of the money falls and
price level persistently rises.”• Prof. Ackly, “inflation is a persistent and appreciable rise in
the general value of average prices”.• Prof. Piguo, “inflation takes place when price level expands
more proportion to output”.
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Types of inflation on the basis of inflation rate
• Creeping inflation• A situation in which the rise in general price level is at a
very slow rate over a period of time. Under creeping inflation, the price level rises up to a rate of 2 percent per annum. A mild inflation is generally considered a necessary condition of economic growth.
• Walking inflation. Walking inflation is a marked increase in the rate of inflation as compared to creeping inflation. The price rise is around 5 percent annually.
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Continued….
• Running inflation. Under running inflation, the price increase is about 8 to 10 percent per annum.
• Galloping or Hyper Inflation. Galloping inflation is a full inflation. Keynes calls it as the final stage of inflation. It is a stage of inflation which starts after the level of full employment is reached. Here price level rises very rapidly within a short period.
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Social Tensions
• Tensions between labor and management, between government and the people, and among consumers may overwhelm a society and its institutions.
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Money Illusion
• The use of nominal Rupee rather than real to gauge changes in one’s income or wealth is called the money illusion.
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Macro Consequences
• Inflation can alter the rate and mixes of output by changing consumption, work, saving, investment, and trade behavior.
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Uncertainty
• People tend to shorten their time horizons in the face of inflation uncertainties.
• Time horizons are shortened as people attempt to spend money before it loses further value.
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Speculation
• Few people will engage in production if it is easy to make speculative profits.
• Such speculation may fuel hyperinflation.– Hyperinflation is an inflation rate in excess of
200 percent, lasting at least one year.
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Bracket Creep
• Bracket creep is the movement of taxpayers into higher tax brackets (rates) as nominal incomes grow.
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Deflation Dangers
• Deflation — a falling price level — might not make people happy either.
• Deflation reverses the redistributions caused by inflation.
• Lenders win and creditors lose.
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Measuring Inflation
• Measuring inflation serves two purposes:– Gauges the average rate of inflation.– Identifies its principal victims.
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Causes of Inflation
• The cause of inflation is rooted in supply and demand.
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Demand-Pull Inflation
• Demand-pull inflation results from excessive pressure on the demand side of the economy.
• “Too much money chases too few goods” enabling producers to raise prices.
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Cost-Push Inflation
• The pressure on price could also originate on the supply side.
• Higher production costs put upward pressure on product prices.