Inflation
The general rise in price level of goods and services over a period of time is known as inflation.
Inflation is characterized by low purchasing power as with an increase in the prices, few goods and services can be bought from each unit of the currency.
Causes of Inflation
Inflation is caused due to following reasons :-
1- Rising wages
2- Import prices
3- Raw material prices
4- Profit push inflation
5- Declining productivity
6- Higher taxes
1- Rising wages:- Rising wages are a key cause of inflation because wages are the most significant cost for many firms.
2- Import prices:- A devaluation/ depreciation means the rupee is worth less. Therefore we have to pay more to buy the same imported goods.
3- Raw material prices:- The best example is the price of oil. If the oil price increases then this will have a significant impact on most goods in the economy and this will lead to inflation.
4- Profit push inflation:- When firms push up prices to get higher rates of inflation. This is more likely to occur during strong economic growth.
5- Declining productivity:- If firms become less productive and allow costs to rise , this invariable leads to higher prices.
6- Higher taxes:- If the government increases taxes , this will lead to higher prices.
-: Effects of inflation :-
1- Inflation can be both beneficial to economic recovery and , in some cases, negative.
2- If inflation become too high the economy can suffer , conversely , if inflation is controlled and at reasonable levels , the economy may prosper .
3- With controlled and lower inflation, employment increases and consumers have more money to buy goods and services, and the economy benefits and grows.
-: Types of inflation :-
Inflation is classified on the following basic-
1- On the basis of rate
2- On the basis of causes
1- On the basis of rate :- On the basis of rate inflation are of following three types-
(i)-Moderate/Creeping Inflation
(ii)- Galloping inflation
(iii)- Hyper inflation
(i)- Creeping inflation:- When the prices of goods and services rise at a single digit rate annually i.e. less than 10% is known as creeping or moderate inflation.
(ii)- Galloping inflation:- When the prices of goods and services increases at two digit or three digit rate per annum then this is known as galloping inflation. It is also known as jumping inflation.
(iii)- Hyper inflation:- When the prices of goods and services increases rapid , excessive and out of control ( generally 50% in a month ) then it is known as hyper inflation.
2- On the basis of Causes:- On the basis of causes inflation are of two types -
(i)- Demand pull inflation
(ii)- Cost- push inflation
(i)- Demand pull inflation:- When aggregate demand increases rapidly for a good or service than the aggregate supply then seller raise their price than it is known as demand pull inflation.
(ii)- Cost- push inflation:- When the cost of raw material, labour and inputs necessary for the production of final good increases then this is known as cost- push inflation.
-: Control of inflation :-
The following steps are given which are required to control inflation-
1- Bank rate policy
2- Case reserve ratio
3- Open market operations
4- Fiscal measures to control inflation
5- Price and wage control
6- Indexation
1- Bank rate policy:- When the central bank raises the bank rate , it increases the cost of borrowing which reduces commercial bank's borrowing, the flow of money from the commercial banks to the public gets reduced .
2- Case reserve ratio:- The central bank raises the CRR( case reserve ratio) which reduces the leading capacity of the commercial banks . Consequently flow of money from commercial banks to public decreases.
3- Open market operations:- Central Bank sells the government securities to the public through the banks . This result in transfer of a part of bank deposits to central bank account and reduces credit creation capacity of the commercial banks.
4- Fiscal measures to control inflation :- Fiscal measures to control inflation include taxation, government expenditure and public borrowing.
5- Price and wage control:- Trying to control wages could help to reduce inflationary pressures. However, it can be difficult to control inflation through income policies, especially if the unions are powerful.
6- Indexation:- Indexation is not actually a method to control inflation but rather is used to adjust monetary incomes with a view to minimizing the undue gains and losses suffered by the different sections of the society because of inflation.
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