Analysis of Inflation

presented by: Pooja singh. 44 Apeksha thakare. 43 Manoj bhosale. 31 Veena mhatre. 49 Sushma pol. 4

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Introduction
We are now in position to explain the nature and causes of inflation. By inflation we mean a general rise in prices. The term "inflation" refers to rising prices of essentials such as wheat, milk, meat, clothing, medical services, coffee, electricity, etc. or, alternatively, the decline in value of money so that it takes more dollars to buy the same goods and services. On the other hand deflation represent persistently falling prices. These days all the economies of the world, underdeveloped as well as developed suffer inflation during the seventies and eighties was very high as compared to the rate of the inflation experienced earlier during peace periods.

Topic objectives
Define and explain the types of inflation ?
Demand pull inflation Cost push inflation Structural inflation

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Demand pull inflation

Demand pull inflation when there is excess AD for goods and services. i.e. a positive output gap ( where actual gdp > potential gdp ) Business respond by rising prices to increase there profit margins. Demand pull inflation associated with the boom phase of the cycle. Root cause of demand pull inflation are usually monitory in origin. Keynes explained that inflation arises when theres occur an inflationary gap in the economy which comes to exist when aggregate demand exceeds aggregate supply at full employment level of output.

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Cost push inflation

- Causes:External shocks (commodity price fluctuations) - A depreciation in the exchange rate - Acceleration in wages / unit labour costs
Leads to inward shift in SRAS Firms raise prices to protect their profit margins better able to do this when demand is price inelastic Wages often follow prices Rise in actual inflation can lead to an increase in inflationary expectations
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The costs of inflation

Taken together, the verdict of economics, history and common sense is that inflation and deflation are costly. It is clear that very high inflation in extreme cases hyperinflation can lead to a breakdown of the economy [or society]. There is now a considerable body of empirical evidence that inflation and output growth are negatively correlated in high-inflation countries. For inflation rates in single figures, the impact of inflation on growth is less clear.

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Costs and consequences

Money loses its value and people lose confidence in money as the value of savings is reduced Inflation can get out of control -price increases lead to higher wage demands as people try to maintain their living standards. This is known as a wage-price spiral. Employees in poor bargaining positions lose out. Inflation can favour borrowers at the expense of savers because inflation erodes the real value of existing debts
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Structural inflation

The structural inflation is also known as theory of inflation. The structuralistic argue that increase in investment expenditure and the expansion of the money supply to finance it are the only proximate . Structuralist theory of inflation in the developing countries especially of latin America.

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INFLATION IN INDIA IN THE Your logo NINETIES AND LATER

In the nineteen seventies and nineteen eighties rate of inflation as measured by wholesale price index (WPI) of all commodities was quite high. Average inflation during the decade of seventies (1971-81) was 10.3 per cent per annum during the decade of eighties (1981-90) was 7.2 per cent .however, in the first eight of nineties (1991-96) average rate of inflation rose to double digit figure of 10.6 per cent per anum .even if we omit the year 1991-92 due the year of transition to economic reforms aimed at liberalizing the Indian economy, rate of inflation in 199293 to less amount 9.8 per cent , that is nearly 10 per cent.

Factors that influence

A) High rate of inflation between 1991-96. 1) Demand pull factor 2) Cost -push factor B) Low rate of inflation from 1996-97 to 200506.

1. Demand pull factor

the average growth of money supple in India 1991-92 to 1995-96 was 17.5 percent per anum. this is much higher than the average annual growth of 5.4 percent GDP at factor cost. supply shock originating from agriculture due to poor monsoon is some years of the period also contributed to the high inflation rate of the first half of nineties.

2. Cost -push factor

But inflation in the first half of nineties and earlier decade cannot be explained Demand-pull factor alone. Cost-push factor also worked to bring about rise in general price level.

 Cost push factor which has been working in the hike in price of crude oil and petroleum product which was raised from time to time whenever world price of this product increased. The rise in administrative prices of important input such as; I. Steel II. Coal III. Cement IV. Freight charges of railway thus, all the above demand-pull and cost-push factor worked to cause high inflation rate in the Indian economy during the first half of nineties (1991-1996)

Low rate of inflation from 1996-97 to 2005-06. the important reason for low inflation rate ,especially the price of manufactured product ,has been the increased. the competition due to trade liberalization the sharp declined in world price of manufactured goods. Due to easy availability of cheap imported products, the domestic manufacturer could not raise prices of their industrial products.

 What factors are responsible for high inflation rate ? a) supply-side factor b) demand-side factor Supply-side factor: the general explanation is that it is occurs result of demand and supply imbalances .and due to low growth of agriculture products such wheat,rice ,edible oil. Rise in oil prices ,rise in cost of manufactured products. Demand -side factor : the rising purchasing power of people, especially those resident in the urban arias. This resulted in rise in the demand for goods which contributed to the rise in manufactured cost.

Before January 2008 large capital inflows dollars were coming into india against which RBI were creating rupee money. these dollar inflow in the year 2007-08 led to the appreciation of rupee. RBI purchased dollar from the market and thereby infused rupee money in the economy which with a time lag of a few months caused demand-pull inflation

Indian inflation in the nineties

1991-92
1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 13.7 10.1 8.4 12.5 8.1 4.6 4.4

1998-99
1999-00 2000-01

5.9
3.3 7.0

EFFECTS ON INFLATION ON AUTOMOBILE COMPANIES IN INDIA

The automobile sector is also suffering because of soaring raw material prices The two-wheeler sector is especially suffering, as banks are not willing to lend fearing delinquency. EFFECT ON STEEL AND RUBBER INDUSTRIES Steel prices have hardened almost 21 in the current calendar year during 2008, aluminium has risen by 16 in the current calendar year. Rubber and plastic prices have also gone up substantially by 17 in the current calendar year and 24 in the current calendar year respectively

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INFLATION IN IT COMPANIES

Patni computers has handed the pink slip to over 400 employees for non performance. TCS other companies warns its employees that non performance wont be tolerated. Companies like wipro and sutherland may cut down on incentives and other perks

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ON Fast moving consumer goods (FMCG FMCGs are feeling the heat of inflation as their input costs have gone up while their sales have stagnated, FMCG majors Godrej and Marico registered a decline of 0.88 percent and 8.28 percent in their total income on sequential quarter basis, while Hindustan Unilever and Dabur managed to post a 15.72 percent and 16.47 percent increase respectively

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Effects of Inflation:
Inflation affects both the economy of a country and its social conditions, as well as the political and moral lives of its inhabitants. However, the economic effects of Inflation are stated and described below: Price inflation has immense effect on the Time Value of Money (TVM). This acts as a principal component of the rates of interest, which forms the basis of all TVM calculations. The real or estimated changes occurring in the rates of inflation lead to changes in the rates of interest as well. The most immediate effect of inflation is the decrease in the purchasing power of dollar and its depreciation. Inflation influences the investments of a country. The Inflation-protected Securities (IPSs) may act as a guard against the loss in the purchasing power of the fixed-income investments (like fixed allowances and bonds), which may occur during inflation.

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 Inflation changes the allocation of income. This exerts maximum effect on the lenders than the borrowers at the time of persisting inflation, because the loans sanctioned previously are paid back later in the form of inflated dollars. Inflation leads to a handful of the consumers in making extensive speculation, to derive advantage of the high price levels. Since some of the purchases are high-risk investments, they result in diversion of the expenditures from regular channels, giving birth to a few structural unemployments
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MEASURES TO CONTROL INFLATION

Inflation occurs due to the emergence of excess demand for goods & services relative to their supply of output at the prevailing prices. The various policy measures to check inflation which is caused by excess aggregate demand are as follows: 1. FISCAL POLICY: (reducing fiscal deficit) The budget deals how a government raises its revenue & spends it. The budget of government is of two type: 1. Revenue budget- (raised through taxes, interests, fess, surpluses from public undertakings) 2. Capital budget- (are marketing borrowings by the government from the banks & other financial institutions, foreign aid, small savings) The deficit may occur either in the revenue budget or capital budget or both taken together.

 To reduce budget deficits and financing within a safe limit, the government can mobilize more resources through raising (a) taxes, both direct & indirect, (b) market borrowings,& (c) raising small savings such as receipts from provident funds, national saving schemes(NSC & NSS) by offering suitable incentives. On the other hand, it can reduce budget deficit by curtailing its wasteful & inessential expenditure. In India, it is often argued that there is a large scope for pruning down non-planned expenditure on defence, police & General Administration & on subsidies being provided on food , fertilizers & exports. Thus , both by greater resource mobilization on the one hand & pruning down of wasteful & inessential government expenditure on the other, the budget deficit & consequently deficit financing can be reduced.

2. MONETARY POLICY: ( Squeezing credit) Monetary policy is another important measure for reducing aggregate demand to control inflation. As an instrument of demand management, monetary policy can work in two ways: (i) cost of credit (ii) credit availability But a recent monetary theory emphasizes that it is the changes in the credit availability rather than cost of credit that is a more effective instrument of regulating aggregate demand. It is the Cash Reserve Ratio (CRR) which can be raised to curb inflation. To contract credit availability Reserve Bank can raise this ratio. In recent years to squeeze credit for checking inflation, CRR in India has been raised from time to time. Another instrument is the Statutory Liquidity Ratio ( SLR) .

 According to SLR, in addition to CRR, banks have to keep a certain minimum proportion of their deposits in the form of specified liquid assets. To mop up extra liquid assets with banks which may lead to undue expansion in credit availability for the business class. 3. SUPPLY MANAGEMENT THROUGH IMPORTS: At times of inflationary pressures in the economy, efforts are to be made to enlarge the import surplus as far as possible. However, the country can achieve & enlarge this import surplus if it has either enough foreign exchange reserves which can be used to spend on imports or if sufficient foreign aid is available to import the goods in short supply.

4. INCOMES POLICY: ( freezing wages) Another anti- inflationary measure which has often been suggested is the avoidance of wage increases which are unrelated to improvement in productivity. This requires exercising control over wage income. However, freezing wages & linking it with productivity only irrespective of what happens to the cost of living has been strongly opposed by trade unions. Indeed, effective way to control inflation will be to adopt a broad- based incomes policy which should cover not only wages but also profits, interest & rental incomes.

5. RAISING AGGREGATE SUPPLY THROUGH FULLER UTILISATION OF PRODUCTIVE CAPACITY: Capacity in some industries may lie unutilized due to lack of effective demand for some products though there may be overall excess demand relative to the aggregate supply of output. This would therefore call for special measures to raise the capacity utilization of the industries experiencing demand recession. It is thus clear that with the adoption of various monetary, fiscal & other policy measures, the aggregate demand can be reduced on the one hand & the aggregate supply of output can be increased on the other. This would help in bridging the gap between aggregate demand & aggregate supply which would enable us to contain the inflationary pressures in the economy

Conclusion: Thus it is analyze that Monetary Measures- Fiscal measures- Physical (Direct) Measures Legal provisions against hoarding & black marketing. Freezing wages. Increasing production-Improving supply of agricultural product-Industrial growth Price control.-Public distribution system Buffer stock

CAUSES OF INFLATION IN INDIA

The global economy has been shaking due to a lot of economic issues indeed these days. In a bid to tackle economic issues, concerned economic agents must make sure they know the precise causes which is a momentous process. The economic inflation has been a centre of attentio n here in the Indian economy. The inflation rates have reached at uncomfortable levels at the moment.

The following are the major & real causes of economic inflation in India
Population on the rise; High economic growth; Lack of agricultural output; Weak INR; & Cost of output heading to north. Well, the above list has been backed up by some minor causes whic h are very inter-linked to the above major causes which are as under: Weak Infrastructure and transportation, Climatic conditions, Usage of out-dated technology, Lack of supply of factors of production, etc

Population on the rise

Some authentic info is as under to back the aforementioned statements pertaining to population. 1) In the year 2001, the Indian population was around 1.01billion. 2) In the year 2010-Apr-1, the Indian population was around 1.21billion.

 Population is a key factor for many economic reasons but it is distracting when it is more than sufficient and is uncontrolled. It is increasing every day as birth rates have gone up and death rates have gone down. Since economic producers are unable to meet the demand comfortably, they do not have any options other than increasing the prices of all concerned economic goods and services and that results in economic inflation. Thus, an increasing trend in population would lead to inflation.

High economic growth (EG)

India is the 10th largest economy on this planet behind Japan, Germany, Brazil, China and the USA, etc. The economic growth has been heading to north each and every financial year in India, normally, projecting more than a 6% a year. Economic growth is what every productive person wishes for. But an imbalance in the contributions made by the economic sectors in the economy al so give a feasible room for inflation. Even if there exists a balance in contribution, that is, 33.3% by each sector, inflation factor would still emerge or rise (if existing) in the economy as no economy on this planet can, strictly speaking, produce all the essential or basic goods and other types of commodities and services in its own economy. That is what has been happening with the Indian economy, too.

Lack of agricultural output

Poor performance in the agricultural and its allied activities continue to be a big worry for the Indian economy, too. This sector has been a worrying one, because it has been failing to meet the total domestic demand and or failing to generate anticipated GDP contributions. The share of this sector towards the GDP is a meager one, which has been normally under 15% for the past few financial years . why on earth the slowdown is on and on in the agricultural production?

 The following are the scientific reasons for that: 1) Climate change. 2) Usage of old tech and methods are on or underway. 3) Lack of reliance on new tech. 4) Lack economic planning and executions made by farmers and other concerned in the agriculture field, too. 5) Lack of finance, etc. There is a need to bolster the agricultural productivity in a bid to make sure food inflation is well under the control of the concerned governments. Please note: food inflation is an integral part of the general inflation.

Weak INR
Weak Indian Rupee is another cause for inflation here in India. The national currency plays a vital role in determining the final value of goods and services that have been imported. Thus, at the international market, in case the value of INR slides, the final costs would be higher indeed. In India, around 676 commodities are chosen to calculate inflation . India is not independent entirely, it has to import some essential commodities to make sure the economic and non economic activities run properly in the economy. Thus, the INR is a key thing which also determines the final prices of goods and services imported. The buying capacity of INR is sliding at the foreign market and thus, the final prices have been increasing which mean inflated goods. The INR has fallen more than a 10% this financial year, 2011, against the greenback.

Causes for fall in the INR value are as under:

Investors pull out their investments from the economy to invest in other economies due to economic and non-economic reasons. By such economic activity of investors, it leads to a fall in the demand for INR, which ultimately results in the fall of the INRs value, too. Political disturbances in the country also reduce the demand for the INR. Other economic issues such as a high rate of inflation also bring down the value of the INR. Stability and insurance of returns on investments assured in other parts of the global economy. Deliberate depreciation by the central bank, etc.

Cost of output heading to north

Population is increasing all the time; the demand for the land is also rising. Cost of labor is also stepping up every time and so as are the final prices of commodities and services, related. This is the impact of higher transfer earnings. The rise in profit margins makes final costs more.
Increase in the cost of marketing has risen due to a stiff competition in the economy these days. Increase in the borrowing costs also contribute to a rise in the final prices. In India, the RBI has increased its key rates for a 12th time in just a period of 18 months, lately. This is done to tame the economic inflation. At the moment, the RBIs repo rate stands at 8.25%. But the borrowing costs are higher these days here. Banks lending rates are at more than 8% per annum.

Thank you

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