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INFLATION

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Whats Inflation ?

Inflation is a rise in the general level of prices of

goods and services over time. "Inflation" is usedto refer to a rise in the prices of some specific setof goods or services, as in "commoditiesinflation".

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Headlines in TIMES OF INDIA

15th August 08 Inflation

continues rising hits 12.44%

14th August 08 PM panel

pegs inflation at 13%

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Causes Of Inflation

1. EXTREME IMBALANCE OF GLOBAL ECONOMY2. FUEL PRICE HIKE

3. HIGHER INTERNATIONAL FARM PRICES

4. FOOD PRICE HIKE

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EXTREME IMBALANCE OF GLOBAL

ECONOMY

This is simply because developed western

economies, particularly the United States, areconsuming on a massive scale, leading to huge

trade imbalance.

Crucially their extreme levels of consumption

and imports are matched by their nay fetish,

of the developing countries. In having an

export-driven economic model.

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FUEL PRICE HIKE

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HIGHER INTERNATIONAL FARM

PRIC

ES What actually compounds the problem for

India, is the fact that- lower harvest

worldwide. Specifically in Australia and Brazil,

the overall strength of demand and supply of

low stock positions world over. Global food

commodity prices have continued to rise.

These global trends have put upward pressure

on domestic prices of food commodities and

are expected to continue to do so during the

course of this year.

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First, there is the impact of high

fuel prices, which affect agricultural

costs directly because of thesignificance of energy as an input

in the cultivation process itself

(through fertilizer and irrigation

costs) as well as in transporting

food.

Across the world , governments

have reduced protection and

subsidies on agriculture, whichmeans that high costs of energy

directly translates into higher costs

of cultivation, and therefore higher

prices of output.

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Effects of Inflation

Economic Effects : The impact of Inflation onthe economic system may be classified into 3

kinds

1) Effects on production (that is changes in

the routine of economic activity)

2) Effects on income distribution (that is ,

re-distribution of income and wealth)

3) Effects on the consumption and welfare .

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Effects on production

Inflation has a favourable effect on

production when there are unutilised or

under-employed resources in existence in

an economy .

Rising prices breed optimistic expectations

within the business community, in view ofincreasing profit margins, because the

price level moves up at a faster rate than

the cost of production.

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Effects on Income distribution

Inflation redistributes income. Prices of all factorsdo not rise in the same proportion. Since the effort

of inflation on the incomes of different classes of

earners varies, there are serious social

consequences.

During inflation, the distribution of shares to the

profiteers increases more than that of the wage

earners or fixed-income earners, such as the rentierclass. All producers , traders and speculators gain

during an inflation because of the windfall profits

which arise, because prices rise at a faster and

higher rate than the cost of production.

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Effects on the consumption

and welfareInflation implies an erosion of the consumers value

of money. It is a form of taxation. Due to

deteriorating purchasing power the real

consumption of the common people declines.

Rising cost of living during inflation implies falling

standard of living and lowering of general

economic welfare of the community at large .

In short, inflation is unfair on the distribution of

side of economic activity.

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FUEL HIKEFuel Hike has taken

its toll on thecommon man.

Inflation has forced

the government to

hike the fuel prices

by approximatelyRs 6/Ltr and LPG

gas by Rs 50/Cyldr.

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This years fuel hike is the highest fuel hike recorded in

the Indian history . LPG which is the essential necessityof every house is on a low supply and not meeting its

demands even after the hike . A Common man just cannot

survive with so many odds going against him .

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FOOD PRICE HIKE

In times of risinginflation, this means that

increased cost of living

for the population.

Commodity prices, for

example, have increasedby around 20% in 2008.

With most of Indias vast population living close to orbelow the poverty line, inflation acts as a Poor Mans

Tax. This effect is amplified when food prices rise, since

food represents more than half of the expenditure of this

group.

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Inflation affecting the common

mans day to day savings

Inflation reduces the real amount of

savings in the long run. Common manis adversely affected when the annual

rate of inflation is exceeding the current

rate of interest. Continuous inflationalso discourages the individual savings

of a common man .

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Inflation widening the gap between

the rich and the poorInflation in a country creates a breeding ground for

social upheavals. Inflation re-distributes income

and wealth in favour of the rich, and widens thegap between the rich and the poor . Inflation

favours the rich and the black marketers . The rich

and the business class get ample chances of

making profit through unfair means , while the poorpeople indirectly suffer the social sins done by the

rich and the manipulating business class. Thus the

rich become richer and the poor become poorer

during inflation .

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Steps taken by the

Government to controlinflation(Ministry of Finance).

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The Government said that liberalization of imports, banning exportsand a cut in excise and customs duties are among the steps taken

by the Government to control inflation in the country.

The Government has directed the Reserve Bank of India (RBI) to

take monetary measures and to put down interest rates to control

Inflation.

The Central Government of India has directed the Chief Ministers

of all the states in India to take preventive measures to control

Inflation like cutting down of sales tax , custom and excise duties .

Some of the state Governments have taken up the initiative to

provide lower priced ration goods for the Below Poverty Line (BPL)

Masses because they are the ones who are the mostly effected .

Steps taken by the Government so far.

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EMPHASIS ON BIOFUELWith petroleum product prices risingsteadily; diesel alone has become 25

per cent costlier over the last year.

Apart from the search for alternatives,

it is the need to achieve energy

independence that is directing somuch focus on biofuels and the crops

that will help yield these oils..

If sugar mills are being encouraged to produce ethanol from

sugarcane for blending with petrol, efforts are on to cultivatesuch crops as jatropha and pongamia, which yield oil that can

either be blended with diesel or used independently. The problem

of the huge oil import bill and the price uncertainty can be

mitigated by cultivating biofuel crops on the over 60 million

hectares of wasteland available in the country.

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Inflation is unjust because it affects

different classes of people in the society

in different ways and in different degrees.

If inflation were to affect everyone in the

society in exactly the same manner and to

the same the degree, it would not alter theeconomic and social relationships in the

community. But inflation takes away

wealth from some people and transfers itto others on a random basis without

taking into consideration the sound

maxim of social equality.