Inflation – Types, Meaning, Causes, Remedies, Inflation UPSC Notes

By BYJU'S Exam Prep

Updated on: November 14th, 2023

Inflation is the general rise in the price level of goods and services over a period of time within a particular economy where the purchasing power of the customer decreases. When the general prices rise, each unit of currency buys lesser goods and services. Inflation in India is measured by the Ministry of Statistics and Programme Implementation (MoSPI). Inflation is a crucial part of the Indian Economy subject in the Prelims exam, and candidates can also find its relevance in the UPSC Mains exam.

Inflation UPSC Questions:

Additionally, questions about types of inflation and other facts can be asked in the Interview Round as well. All these facts make it an imperative topic, and candidates must take the help of Inflation UPSC Notes for effective and efficient preparation.

What is Inflation?

In simple words, Inflation is defined as the rise in the price of goods and services within an economy over a period of time due to which each unit of currency has less purchasing power.

Inflation UPSC [PDF]

  • It can have positive and negative consequences like it is good for tangible assets but has a negative effect on cash holdings.
  • It is estimated as the % rate of change in price index over the reference time period.
  • The rate of Inflation in India 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

Recent News: Wholesale Inflation in India rose to 13.11%, while the retail inflation rate measured by CPI peaked at 6.07% in February 2022.

Types of Inflation

We have segmented the types of inflation based on causes and speed or intensity. Based on causes, it is divided into the following types:

  1. Currency inflation: It is caused by the printing of currency notes.
  2. Credit inflation: This happens when credit expansion leads to a rise in the price level.
  3. Deficit-induced inflation: It happens when expenditure exceeds the revenue, and the government can ask RBI to print money to meet the budget deficit.
  4. Demand-Pull inflation: It happens when an increase in aggregate demand over the available output leads to a rise in the price level.
  5. Cost-push inflation: This may arise from the overall increase in the cost of production.

Based on Speed or Intensity, the types of inflation are as follows:

  1. Creeping or Mild Inflation
    • When the speed of upward thrust in prices is slow but small, it is known as creeping inflation.
    • It is helpful for economic development.
    • Price rise at a very small rate (<3%).
  1. Walking or Trotting Inflation
    • When prices rise moderately, and the annual inflation rate rises by a single digit.
    • It is the time when government should focus on the issue.
    • Price rises at a moderate rate (3% to 10%).
  1. Galloping and Hyperinflation:
    • When creeping and walking inflation are left unchecked, the rate will rise above 10%, called galloping inflation.
    • This leads to instability of the economy.
    • Hyperinflation is when the prices of goods and services rise more than 50% per month.
    • It is the last stage of inflation.
    • Examples: Germany in the 1920s, Zimbabwe in the 2000s, American Civil War, and Venezuela in 2018.
    • Price rise at a very high rate (20% to 100%).
  1. Stagflation:
    • It is a situation in which the rate is high, the economic growth rate slows, and unemployment remains steadily high.
    • It is also known as recession inflation.
    • It is a dilemma for economic policy since actions intended to lower the rate may worsen the unemployment situation.
  1. Core Inflation
    • Price rise in all goods and services except food and energy due to high price fluctuations is core inflation.
    • It is calculated as government needs a stable and true picture of the rate of price rise.
  1. Headline Inflation
    • This measure considers total inflation in an economy, including food and energy prices, which are more volatile.

Causes of Inflation

Some major causes of inflation include demand-pull factors, cost-push factors, built-in, and monetary inflation. We have covered all these causes in brief below.

Demand Pull Inflation

These are the set of factors due to which there may be an increase in the demand for goods and services in an economy. Its example includes the following:

  • An increase in government expenditure puts more money in the hands of the public, increasing demand, and prices automatically increase.
  • Population increase
  • Money hoarding
  • Fluctuated consumption pattern.

Cost Push Inflation

This factor results from the increase in the prices of production process inputs. For example: If wages increase, productivity and an increase in the price of a product can be seen.

  • An increase in indirect taxes like customs and excise duty raises the cost of production and increases the price
  • MSP (Minimum Support Price) increase
  • Infrastructural issues
  • Failed monsoon and disaster

Built-In Inflation

As the price of goods and services increases, labour expects and demands more wages to maintain their cost of living, increasing prices and the wage-price spiral continues.

Monetary Inflation

Reserve Bank of India printing more money (deficit financing) can trigger inflation. It is a sustained increase in the money supply of a country or currency area.

Remedies of Inflation

There are some remedies of inflation that can be taken by the Reserve Bank of India or the Central Government, which are listed below:

Monetary Policy: The monetary policy of RBI aims to manage the quantity of money to meet the requirements of different sectors of the economy and drive economic growth. This policy is applicable by increasing interest rates and decreasing bond prices. This helps to reduce the expenses during inflation that pause the economic growth and the inflation rate.

Fiscal Policy: Fiscal policy can be taken by the government in two ways:

Supply Management Measures:

  • Import commodities that have less supply and Decrease exports
  • Distribution through Public Distribution System
  • The government may check on hoarding

Measurement of Inflation

Wholesale Price Index (WPI): Wholesale Price Index or WPI measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. It is released by the Economic Advisor in the Ministry of Commerce and Industry.

  • An upward surge in WPI indicates inflationary pressure in the economy.
  • The base year is taken 2011-12 in India.
  • Major components of WPI are primary articles subdivided into Food Articles and Non-Food Articles.
  • Other components: Fuel & Power, Manufactured Goods like Textiles, apparel, Metals, Sugar, Oils, and more.
  • The monthly WPI shows average price changes of goods, usually expressed in ratios or percentages.
  • However, it does not include services such as the health, IT, Education, transport and unorganized sector, etc.

Consumer Price Index: It measures retail inflation in the economy by collecting the change in prices of common goods and services like food, housing, apparel, transportation, electronics, medical care, education, etc. This provides insights as to how much a consumer can spend to be on par with the price change.

Producer Price Index: it measures the average price changes in the selling prices over time received by the domestic producer.

Effects of Inflation on Economy

Following are the effects of Inflation on the economy:

  • Some group faces losses while the other group faces gains.
  • The demand decreases, which hampers production.
  • Imports increase and export decrease for other countries that directly impact the forex service.
  • Sudden inflation rates are harmful to the overall economy. It causes instability in the market that makes it difficult for the companies to plan their long-term budget.

Effects of Increasing Inflation

Increasing Inflation has both positive and negative impacts. Below we have jotted down both benefits and disadvantages of increasing inflation.

Benefits Disadvantages
Lower interest rate Lower purchasing power
Profits of business people Salaried and pensioners suffer
Export benefits due to currency depreciation Imports suffer due to the depreciation of the currency
Increasing nominal wage Decrease in the real wages
Investment, savings, and a rise in employment in the short term. A decline in competitiveness
Currency depreciation Rupee purchasing power declines

Terms Related to Inflation

Some terms related to Inflation are as follows:

  • Disinflation: Decrease in the rate
  • Deflation: Negative inflation or persistent price level decrease.
  • Reflation: This happens when the Price level increases because the economy recovers from recession.
  • Stagflation: When stagnation and inflation coexist in the economy. Stagnation- low national income growth and high unemployment. Inflation + Recession (Unemployment)
  • Misery index: Rate of inflation + Rate of unemployment
  • Inflationary gap: Aggregate demand > Aggregate supply
  • Deflationary gap: Aggregate supply > Aggregate demand
  • Suppressed / Repressed inflation: Aggregate demand > Aggregate supply. The government will not allow the rising of prices in this.
  • Open inflation: A situation where the price level rises without any price control measures by the government.

Inflation UPSC

Questions from Inflation were asked in both UPSC Prelims and Mains exam. That is why all UPSC aspirants must have in-depth knowledge about the types of inflation and other related concepts to help them answer these questions successfully. We have prepared Inflation UPSC Notes that would come in handy during the preparation of the Prelims, Mains, and Interview, which can be downloaded from the direct link above.

Inflation UPSC Questions

Q1: Inflation can be defined as:

a) A decline in the general price level
b) An increase in the general price level
c) Stability in the general price level
d) A decline in the overall production level

Answer: b) An increase in the general price level

Q2: Which of the following is a measure of inflation that considers the prices of a fixed basket of goods and services typically consumed by urban households?

a) Wholesale Price Index (WPI)
b) Consumer Price Index for Industrial Workers (CPI-IW)
c) Consumer Price Index for Rural Laborers (CPI-RL)
d) Consumer Price Index (CPI)

Answer: d) Consumer Price Index (CPI)

Q3: Demand-pull inflation occurs when:

a) The government increases taxes
b) The government reduces spending
c) Aggregate demand exceeds aggregate supply
d) The money supply increases

Answer: c) Aggregate demand exceeds aggregate supply

Q4: The term “core inflation” refers to:

a) Inflation caused by changes in food and energy prices
b) Inflation excluding volatile components like food and energy prices
c) Inflation caused by changes in the exchange rate
d) Inflation due to changes in the money supply

Answer: b) Inflation excluding volatile components like food and energy prices

Q5: Which of the following can be a measure to control inflation?

a) Increasing government spending
b) Decreasing taxes
c) Reducing interest rates
d) Expanding money supply

Answer: c) Reducing interest rates

Q6: Cost-push inflation is caused by:

a) Excessive government spending
b) An increase in aggregate demand
c) A decrease in production costs
d) An increase in wages or raw material prices

Answer: d) An increase in wages or raw material prices

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