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Lecturrete Topic 105 - Inflation


The term "inflation" originally referred to a rise in the general price level caused by an imbalance between the quantity of money and trade needs. However, economists today commonly use the term "inflation" to refer to increases in the price level. An increase in the money supply may be called monetary inflation, to distinguish it from rising prices, which for clarity may be called "price inflation". Economists generally agree that in the long run, price inflation is related to increases in the money supply.

Conceptually, inflation refers to the general trend of prices, not changes in any specific price. For example, if people choose to buy more cucumbers than tomatoes, cucumbers consequently become more expensive and tomatoes cheaper. These changes are not related to inflation; they reflect a shift in tastes. Inflation is related to the value of currency itself. When currency was linked with gold, if new gold deposits were found, the price of gold and the value of currency would fall, and consequently, prices of all other goods would become higher.

Other economic concepts related to inflation include: deflation – a fall in the general price level; disinflation – a decrease in the rate of inflation; hyperinflation – an out-of-control inflationary spiral; stagflation – a combination of inflation, slow economic growth and high unemployment; reflation – an attempt to raise the general level of prices to counteract deflationary pressures; and asset price inflation – a general rise in the prices of financial assets without a corresponding increase in the prices of goods or services.

What Are The Effects Of Inflation?

The purchasing power of a currency unit decreases as the commodities and services get dearer. This also impacts the cost of living in a country. When inflation is high, the cost of living gets higher as well, which ultimately leads to a deceleration in economic growth. A certain level of inflation is required in the economy to ensure that expenditure is promoted and hoarding money through savings is demotivated.

As money generally loses its value over time, it is important for people to invest the money. Investing ensures the economic growth of a country.

Who Measures Inflation In India?

Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of the economy. In India, the Ministry of Statistics and Programme Implementation measures inflation.

How Is Inflation Measured?

In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index), which measure wholesale and retail-level price changes, respectively. The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.

On the other hand, the goods or services sold by businesses to smaller businesses for selling further is captured by the WPI. In India, both WPI (Wholesale Price Index) and CPI (Consumer Price Index) are used to measure inflation.

Causes Of Inflation

The main causes of inflation in India have been subject to considerable debates and discussions. These are some of the chief reasons for the increase in prices:

  • High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.

  • Excess circulation of money leads to inflation as money loses its purchasing power.

  • With people having more money, they also tend to spend more, which causes increased demand.

Also, note the following pointers:

  • Spurt in production prices of certain commodities also causes inflation as the price of the final product increases. This is called cost-push inflation.

  • Increase in the prices of goods and services is also a factor to consider as the involved labour also expects and demands more costs/wages to maintain their cost of living. This spirals to further increase in the prices of goods.

Inflation is perceived differently by everyone depending upon the kind of assets they possess. For someone with investments in real estate or stocked commodity, inflation means that the prices of their assets is set for a hike. For those who possess cash, they may be adversely affected by inflation as the value of their cash erodes.

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