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What Is inflation ? – Explain
- Inflation refers to a state in the economy where too much money chases too little goods and services. In such state there is general increase in the price level of goods and services over a period of time which results into fall of value of money.
Terms related to Inflation
- Creeping Inflation: It is the mildest form of Inflation where prices rise by not more than 3% per annum.
- Walking Inflation: In the case of walking Inflation the prices rise by more than 3% but less than 10% per
- Running Inflation: An economy is said to be encountering the Running Inflation, when the rate of Inflation is 10% to 20% per annum (double digit Inflation rate).
- Galloping Inflation: If the prices rise by more than 20% but less than 1000% per annum, galloping Inflation occurs. It is also referred to as jumping Inflation. India has been witnessing galloping Inflation since the second five year plan period.
- HyperInflation: HyperInflation ation refers to a situation when prices rise above 1000% per annum (quadruple or four digit Inflation rate). In case of hyperInflation there is such rapid rise in the price level and fall in value of money that people start losing faith in the paper currency of the government. During a worst case scenario of hyperInflation paper money becomes worthless. Two worst examples of hyperInflation recorded in world history are of those experienced by Hungary in year 1946 and Zimbabwe during 2004-2009.
- Stagflation: It is a situation where Inflation coexists with stagnation i.e. recession and unemployment.
Classical economics referred this situation as paradoxical.
- Recession: It is defined as the situation in the economy which is marred by a negative growth rate of GDP for
two or more successive
- Core Inflation: It refers to inflation which does not include the impact of such factors which are beyond the
control of the government. For example international oil prices etc.
- Depression: It an extreme form of recession where there is contraction in business cycles, fall in demand and
investments, rise in unemployment levels, which results to business pessimism and total collapse of
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Causes of Inflation – List of Causes given below
Inflation may be caused by either an increase in the money supply (demand pull) or a decrease in the quantity of
goods (cost push) being supplied.
Demand pull factor:
- Increase in population of the country
- Rise in money supply due to deficit Financing or printing of excessive currency
- Rises in wage and salaries in the country
- Increase in black money or parallel economy
- Rise in expenditure of the government especially under the non-plan expenditure head.
Cost push factor:
At any given point of time inflation is the result of a mix of these two factors.
- Shortfall of production in the agriculture mainly because of erratic rainfall during monsoon
- Rise in international fuel prices
- Rise in income, wages and salaries
- Speculation, black marketing and hoarding etc.
- Increase in the import bill due to price hike in the international market especially for inputs like machinery and
Measurement of Inflation in India:
- The Indian government has taken Wholesale Price Index (WPI) as an indicator of the rate of Inflation in the economy on weekly basis. India is perhaps the only major country that uses WPI to measure Inflation. In most of the countries the consumer indices are used to calculate Inflation.
Wholesale Price Index (WPI)
- WPI is based on the price prevailing in the wholesale markets or the price at which bulk transactions are made.
- In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.
- It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks.
Problems with WPI
- WPI accounts for wholesale prices, however they are different from the retail prices or the prices at which the
end consumer buys the goods. Thus WPI at times might not reflect the real picture.
- WPI doesn’t take the price of services into consideration
- WPI is too general and cannot be used for specific purposes for different sectors.
- Some commodities may have higher weights during a particular season and may not be consumed during
other. For example, woollen textiles are part of the consumption basket only for four months in a city like
- So a constant revision of weights is required in this regard, which WPI does not take into consideration.
Consumer Price Index (CPI) is much more representative index for common man as in this index; nearly 57%
weight-age is given to the food and primary articles.