GK Notes based on Inflation and its types
- The general rise in the price level of goods and services.
- It is estimated as the percentage rate of change in the price index over the reference time period.
- Currently in India inflation rate is measured with the help of the Consumer Price Index- combined (Base year- 2012).
- Till April 2014, the Inflation rate was measured with the help of the WPI (Wholesale Price Index).
- Rate of Inflation= (Current period price index-Reference period price index)/(Reference Period Price Index)×100
Type of Inflation
Based on the rate of raising Inflation
1. Creeping Inflation
- Price rise at a very small rate (< 3 %)
- It is considered safe and essential for the economy.
2. Walking or Trotting Inflation
- Price rise at moderate rate (3 % < Inflation < 10 %)
- Inflation at this rate is a warning signal for the Economy.
3. Running Inflation
- Price rise at high rate (10 % < Inflation < 20 %)
- It affects the economy adversely.
4. Hyperinflation or Galloping Inflation or Runway Inflation
- Price rise at very high rate (20 % < Inflation < 100 %)
- This situation brings the total collapse of the Economy.
Based on causes
- Demand-Pull Inflation: When Inflation arises due to higher demand for goods and services over the limited supply.
- Cost-Push Inflation: When Inflation arises due to higher input costs (Example- raw material, wages etc.) for goods and services over the limited supply.
- Built-in Inflation: This type of inflation involves a high demand for wages by the workers which the firms address by increasing the cost of goods and services for the customers.
Cost pull inflation is considered bad because the National Income is reduced along with the reduction in supply in the Cost-push type of inflation.
- It is the opposite of Inflation.
- Reduction of the general level of price in an economy.
- In this price index measured is negative.
2. Stagflation: When stagnation and inflation coexist in the economy.
3. Stagnation: low national income growth and high unemployment.
- When the rate of Inflation is at a slower rate.
If the Inflation of last month was 4% and the rate of inflation in the current month is 3%.
- The deliberate action of the government to increase the rate of inflation to redeem the economy from a deflationary situation.
6. Core Inflation:
- It is a measure of price rise in the economy excluding the price rise of some products (whose price is volatile and temporary in nature.
Effects of Inflation
1. Redistribution of income and wealth
- Due to the effect of inflation, some groups of people lose and other groups of people gains.
In the case of debtors and creditors
In the case of Producers and Consumers
2. Effects on Production and Consumption
- Due to inflation, the demand decreases which curtails the production.
- People try to use fewer services which leads to a decrease in consumption.
3. Unfavorable Balance of Payments
- Export decrease and import increases from other countries which lead to a decrease in forex reserve.
4. Moderate inflation enables labour markets to reach equilibrium at a faster pace.
5. Inflation leads to market instability and thereby makes it difficult for companies to plan a budget for the long term.
Measurements of Inflation:
- Wholesale Price Index (WPI) – It is estimated by the Ministry of Commerce & Industry and measured on a monthly basis.
- Consumer Price Index (CPI) – It is calculated by taking price changes for each item in the predetermined lot of goods and averaging them.
- Producer Price Index – It is a measure of the average change in the selling prices over time received by domestic producers for their output.
- Commodity Price Indices – It is a fixed-weight index or (weighted) average of selected commodity prices, which may be based on spot or futures price
- Core Price Index – It measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices. It is a way to measure the underlying inflation trends.
- GDP deflator – It is a measure of general price inflation
Measures to control Inflation
1. Credit control-
- It is used by RBI.
2. Increase in Direct Taxes
- Due to the increase in direct taxes, people have less money available to them and low demand from them leads to a lower price.
3. Price Control
- By fixing the maximum price limit by authorities.
4. Trade measures
- Maintain proper supply in the economy by exporting and import of goods and services.
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