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Inflation and its control: Case study of present day

India

Inflation and its control: Case study of present day

India

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GROUP 2

Sayali Chitnis 7 Gurunath Choukekar 8 Cyril James 9 Sushil Dalvi 10 Franson Furtado 68 Savio Gaspar 69 Santosh Ibrampurkar 70

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“ Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”

-Sam Ewing (1920-2001) American writer and humorist

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Session Plan 1. What is Inflation?2. Three Strains of Inflation3. Classification of Inflation based on its sources4. Causes of inflation5. How it is measured? 6. Effects of inflation on Economy a) Positives of Inflation b) Negatives of Inflation 7. Inflation Statistics of India 8. How to control Inflation?

INFLATION “Inflation is nothing more than a sharp

upward rise in price level.” Too much money chasing, too few

goods.” Inflation is a state in which the value of

money is falling i.e. price are rising.”

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3 STRAINS OF INFLATION

1]Low Inflation: Single digit annual inflation rates(most industrial Countries)

2]Galloping Inflation: Double digit or triple digit inflation rates(Countries suffering from weak govt. or war)

3]Hyper Inflation: Prices are rising million or trillion percent per year.(go with money in basket and come with food in pockets)

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CLASSIFICATION OF INFLATION(BASED ON ITS SOURCE)

Demand Pull Inflation: Rapid Money-supply growth increases demand which in turn increases the price level.(Too much money chases too few goods)

Cost- Push inflation( Supply Shock Inflation): Inflation resulting from rising costs during periods of high unemployment and slack resource utilization.

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Demand-pull Inflation

Ep

Ep1

D

D1

S

Eq Eq1

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Cost-push Inflation

Ep1

E

E1

SS1

D

CAUSES OF INFLATIONo Increase in money Supplyo High demand for primary

articleso Surging global oil price hikeo Global Economic Fluctuationso Future Trading of necessity

goodso Rising Imported raw materialso A depreciation in the Exchange

rateo Rapid growth of Money Supplyo Increasing the rate of growth of

real estate priceso Deficit Financing o Black Money

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HOW INFLATION RATE IS MEASURED?

1]CPI Method (Consumer Price Index)

2]WPI method(Wholesale Price Index)

3] PPI method(Producer Price Index)

Inflation Rate(IR):IR= PI for a certain year - PI for a comparative year

X 100 PI for a comparative year

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WPI CPI

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market.

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.

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers.

It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

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DRAWBACKS WPI METHOD

1. WPI does not properly measure the exact price rise an end-consumer will experience because, as the name suggests, it is at the wholesale level.

2. More than 100 out of the 435 commodities included in the Index are not consumed by Consumer

3. WPI is supposed to measure impact of prices on business. But we use it to measure the impact on consumers.

4. Service sector plays a key role in Indian economy. Consumers are spending loads of money on services like education and health. And these services are not incorporated in calculation of WPI.

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BUT THEN WHY INDIA IS USING WPI? 1. There are four different types of CPI

indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.

2. Officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers.

3. The WPI is published on a weekly basis and the CPI, on a monthly basis. And in India, inflation is calculated on a weekly basis.

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EFFECTS OF INFLATION:

EFFECTS OF INFLATION ON THE ECONOMY:

•They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term.

•Uncertainty about the future purchasing power of money discourages investment and saving.

•Our fixed income gets depleted & we find ourselves having to survive on even lesser.

EFFECTS OF INFLATION(NEGATIVE):

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There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.Higher income tax rates. Inflation rate in the economy is higher than rates in other countries; this will increase imports and reduce exports, leading to a deficit in the balance of trade.

EFFECTS OF INFLATION(NEGATIVE):

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EFFECTS OF INFLATION(NEGATIVE): Inflation affects you directly when you go to

the grocery store but find that a hundred dollars doesn't get you the same amount as it did last year.

Creditors (or savers) are hurt by inflation, but debtors (or borrowers) are helped by inflation.

Inflation redistributes real income from some

people to others.19

EFFECTS OF INFLATION (POSITIVE)

Some demand-pull inflation encourages firms to increase production in anticipation of receiving a higher price for the output sold. This contributes to employment and investment.

Inflation encourages firms to seek more efficient methods of production. This increases the production possibility frontier for the economy

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2006-2007 2007-2008

Inflation 7.8 12.0

Food inflation 10.3 17.6

Non-food inflation 6.2 6.8

INFLATION RATES

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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-1102468

1012141618

CPI

CPI

INDIA INFLATION RATES

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Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011 9.30                      

2010 16.22 14.86 14.86 13.33 13.91 13.73 11.25 9.88 9.82 9.70 8.33 9.47

2009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 13.51 14.97

2008 5.51 5.47 7.87 7.81 7.75 7.69 8.33 9.02 9.77 10.45 10.45 9.70

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