INFLATION

INFLATION

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected
goods and services in an economy increases over a period of time.
It is the constant rise in the general level of prices where a unit of currency buys less than it did in
prior periods.
Often expressed as a percentage, infl ation indicates a decrease in the purchasing power of a nation’s
currency.
Infl ation can be viewed positively or negatively depending on the individual viewpoint.
Those with tangible assets, like property or stocked commodities, may like to see some infl ation as
that raises the value of their assets.
People holding cash may not like infl ation, as it erodes the value of their cash holdings.
Ideally, an optimum level of infl ation is required to promote spending to a certain extent instead of
saving, thereby nurturing economic growth.
Understanding Inflation
As prices rise, a single unit of currency loses value as it buys fewer goods and services. This loss of
purchasing power impacts the general cost of living for the common public which ultimately leads
to a deceleration in economic growth. The consensus view among economists is that sustained
infl ation occurs when a nation’s money supply growth outpaces economic growth.
To combat this, a country’s appropriate monetary authority, like the central bank, then takes the
necessary measures to keep infl ation within permissible limits and keep the economy running
smoothly.
Infl ation is measured in a variety of ways depending upon the types of goods and a service considered and is the opposite of defl ation which indicates a general decline occurring in prices for goods and Services when the infl ation rate falls below 0%.
Causes of Inflation
Rising prices are the root of infl ation, though this can be attributed to different factors. In the context of causes, infl ation is classifi ed into three types: Demand-Pull infl ation, Cost-Push inflation, and Built-In infl ation.
Demand Pull factors:
These are those set of factors due to which there may be an increase in the demand for goods and
services in the economy. Increase in government expenditure:
Increased government expenditure results in increased demand for goods and services and consequent increase in prices. This is because increased government expenditure results in putting
large money in the hands of public, thereby putting to affect too much money chasing too few goods.
Rising population: Increasing population also acts as an important factor in pushing up prices
because of increased demand especially when the supply is unable to meet the demand.

Black Money: A large part of the black money is used in buying and selling of real estate in urban
areas, extensive hoarding and black marketing in essential wage goods, such as cereals, pulses, etc.
Black money, therefore, fuels demands and leads to rise in prices.
Changing consumption patterns: Reserve Bank of India (RBI) put forward the theory that the inflation problem in India has its roots in a sharp increase in demand for certain food items that people eat more frequently as incomes rise. One example is protein-rich food. Increased consumption of pulses, eggs, fish and poultry were apparently driving up their prices in the economy.
Cost- Push Factors:
The reasons are:
At times rise in wages, if greater than rise in productivity, increases the costs therefore increasing
the prices too.
Increase in indirect taxes also leads to cost side inflation. Taxes such as custom and excise duty raise
the cost of production as these taxes are levied on commodities.
Increase in administered prices such as the MSP (Minimum Support Price) for the food grains,
petroleum products, etc. also leads to inflation as they have a huge share in budget of common citizens.
Infrastructural bottlenecks such as the lack of proper roads, electricity, water, etc rise per unit cost
of production. This is one of the prime reasons for inflation in the context of Indian economy.
Owing to events such as failed monsoons there is a drop in agricultural productivity, which inevitably results in inflation at times.

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