3. What is inflation?
In economics, inflation is a rise in the general level of
prices of goods and services in an economy over a period of
time. When the general price level rises, each unit of
currency buys fewer goods and services. Consequently,
inflation also reflects erosion in the purchasing power of
money – a loss of real value in the internal medium of
exchange and unit of account in the economy.
Crowther defines inflation as “a state in which the value of
money is falling i.e. prices are rising”.
Coullborn says it is a phenomenon where, “too much
money chases too few goods”.
4. Is it inflation is such a problem
which will effect the economic
growth?
5. Effects of inflation:
Generally, we mean inflation as general rise in price
level, actually the prices of different goods and services rise at
different rates. This results in change in the pattern of income
distribution in the community which is the source of many evil
effects.
Due to inflation velocity of money rises, savings gives place to
dis saving so in turn it affects the capital formation
There will be chance of earning more profits out of rising prices
this development may lead to black marketing.
Inflation makes business planning and long term
investment risky.
The creditors are affected adversely because purchasing
power of the money will be lower than that of the money which
they had lent.
6. The people worst hit by inflation are those who are least
able to protect themselves. Inflation causes hardships to all
who live on fixed incomes. E.g. pensioners, widows, factory
workers etc..
7. Does inflation promotes economic
development?
Yes: No:
Keynes, hold the opinion that Inflation does not facilitate
inflation, in one form or the economic growth and, on the
other, helps mobilization of
resources by redistributing contrary, hinders the process
income and wealth away from of economic growth.
wage recipients towards the Friedman believes that
profit recipients.
favorable effects cannot be
Some economists believe that
inflation is a product of obtained by deliberate
economic growth. Some expansion in the supply of
inflation is considered to be money without its
unavoidable in the process of degenerating into hyper
economic development. inflation.
8. Inflation based on Consumer Price Index at 7.65% in January.
Food inflation turns negative -0.42% on January 19, 2012 .
World inflation rate (consumer prices): developed countries 2.5%
developing countries 5.6%.
Inflation rate is defined as the annual percent change in consumer prices
compared with the previous year's consumer prices.
If P0is the current average price level and P-1is the price level a year
ago, the rate of inflation during the year might be measured as follows:
Methods of calculating inflation rate:
>Wholesale Price Index
>Consumer Price Index
9.
10. Performance of anti-inflationery
measures in India:
Gargantuan(huge) spending without addressing underlying supply
bottlenecks.
Government has failed to ensure that the economy can produce
and efficiently distribute goods & services. This is the core cause of
inflation.
The anemic growth in infrastructure industries is an indicator of the
policy failures that have led to inflation.
NREGA has contributed to price rises in many areas because
the UPA government has failed to make rural markets
competitive. In a village with a few shops, any rise in income of the
villagers will cause shopkeepers to increase their prices.
The failure to dismantle barriers to agricultural marketing
and failure to integrate India into a single market for agricultural
goods not only contribute to food price inflation but undermine
the welfare of farmers.
11. Suggestions to curb the inflation:
Fine tuning up of the monetary policy. As IMF
suggested our central bank to tightening of money supply
to control inflation.(19 April 2007, TIMES NEWS
NETWORK).
The Reserve Bank of India (RBI) is hiking the interest rates
consecutively. The underlying reason for these hikes
remains the same - higher inflation.
So this with another question as to what else can the
government do to control inflation? Well this is not an
option that can continue for too long. Higher interest rates
force organizations and consumers alike to postpone their
buying or spending decisions. This hampers the economic
growth. So the government should make more
desirable monetary policies to curb the inflation.
Another option that the government has is to use the
fiscal policy to check inflation. This means that the
government raises tax rates, which in turn would bring
down disposable income and would hence impact demand.
12. The government could choose yet another alternative of
direct intervention. It could set limits on the rate of
growth of wages. This would reduce the disposable
income available to the people and in turn would help
curtail demand thereby bringing down the prices.
The government would cut down its own spending as
well as borrowing targets as well. This would reduce the
demand pulled inflation in the country.
The government has is to reform the long-term policies
related to labor as well as the supply side. Reforming
these policies would remove the bottlenecks that exist in
the supply chain. This would effectively help reduce the
cost push inflation. Reforming labor policies would help
weaken trade unions and give more flexibility for healthier
negotiations for both the companies as well as for the
employees. This in turn would help control the wage cost
inflation in the long term.
