2. Inflation
Outside a shop where Christmas trees are being
sold…
“Is it going to be the same size as last year or the same
price as last year?”
Sustained increase in the general price level
General Price Level – measured as consumer prices
and wholesale prices/industrial goods prices
More about value of money than about value of
goods
3. Related concepts
Velocity of money
(P *Q)/M = V
MV = PY (Fisher Equation)
Money Neutrality
Assumes no role of money in the effect on real output
Short run changes do happen
Assumes no effect on production, wages and interest rates
Weak concept
4. Types of inflation
Creeping
Crawling
Galloping
Hyperinflation
Stagflation
Cost push
Demand pull
Headline vs Core (WPI – food and fuel)
5. Cost push Inflation
Comes through increases in factor prices
Wages
Raw materials
Affects the Aggregate supply
Affects productivity
Wage push inflation
Profit push inflation
By oligopolists or monopolists – greed to get more
Wage price spiral
6. Demand pull Inflation
Comes through increased goods demand
Change in the Aggregate Demand function
Changes in interest rates can affect demand
Govt expenditure shifts AD
Excessive foreign inflows affect AD
Inflationary gap
The amount by which AD exceeds aggregate output at full
employment level
Causes inflationary spiral
7. Effects of Inflation
Income distribution
Producers – profit earners gain
Wage Earners
Depends on bargaining power
Retired/Aged
Suffer from low value of savings
Investors
Equity – gain; Interest earners – lose
Debtors/Creditors
Debtors – gain; creditors - lose
8. Effects…
Rent earners
Fixed contracts – hurt
Effect on Wealth distribution
Effect on Output and Employment
Leads to improvement in resource allocation
Negative in terms of productivity losses
9. Deflation
Persistent and appreciable fall in prices
Where AD falls short of available output
Pessimism
Leads to idle capacity in various sectors
Reverse multiplier gets into action
MEC falls
Inflation vs Deflation – former preferred (Why??)
10. Stagflation
Unemployment, lack of growth and inflation
Rise in prices – causes fall in output
Expectations of future prices – also downward
No incentive to borrow – since costs are high
No incentive to produce – since demand is low
No incentive to consume – since prices are high
Kind of very low economic equilibrium –
experienced by developed economies – US and
Germany
11. Other costs..
Shoeleather Costs
Resources wasted when inflation encourages people to reduce
their money holdings and keep more money in banks (interest
bearing assets)
Menu costs
Costs of changing prices
Printing, informing – customer annoyance costs
12. Consumer Price Index
CPI – IW
The CPI-IW purports to measure the temporal change in the retail
prices of fixed basket of goods and services being consumed by the
target group i.e. an average working class family and thus, is an
important indicator of the retail price situation in the country.
Used for determination of DA
CPI – AL/RW – to be done away with
CPI – Urban
CPI – Rural
CPI - combined
Base year 2013-14 = 100 (New)
http://labourbureau.nic.in/indexes.htm
13. CPI - Weights
Food, Beverages and tobacco (49.71)
Fuel and light (9.49)
Clothing, bedding and footwear (4.73)
Housing (9.77)
Misc (26.31)
Conduct of Income and Expenditure Survey (NSSO)
Organisation of price collection work
House Rent surveys – rented and self-owned
14. CPI..
Base year fixation
Method – Base year price * Base year quantity;
Current year price* Base year quantity
New base year 2010 – released in Feb 2011
310 towns – 1114 price schedules – on average 250
items per month
CPI (Rural) – 1181 villages
Price collectors – Post officials
15. Wholesale Price Index (2004-05)
Rationale to Compute WPI
Concept of wholesale price
Agricultural commodities
Non – agricultural (ex-factory gate price)
Wholesale price vs producer price – latter includes taxes
and transport charges
Selection of items (total number of items – 676 in basket)
Agricultural items (M/O Agriculture), National Horticulture
Board, Spices Board, Tea board, Coffee Board and Rubber
Board, Silk Board, Directorate Of Tobacco, Cotton Corporation of
India )
Organized manufacturing
16. WPI…
ASI Prices
Unorganized/unregistered
manufacturing - Own
Account Enterprise (OAE), Directory Manufacturing
Establishment
(DME)
and
Non-Directory
Manufacturing Establishment (NDME), Economic
Census and its follow up surveys and Census of
Registered SSI units
17. WPI groups
Primary Articles
Fuel, Power, Light and Lubricants
Manufactured Products
Weightages – 20.11, 14.91 and 64.97
Refer doc WPI weights - observations
18. WPI vs CPI
Why different measures
Importance of both
Measurement in India
Need for a consolidated index
CPI (Rural + Urban)
19. Index of Industrial Production
Index of Industrial Production (IIP) is an abstract
number, the magnitude of which represents the
status of production in the industrial sector for a
given period of time
Basic goods
Capital goods
Intermediate goods
Consumer durables
Consumer non-durables
20. IIP..
543 items
Method of data collection – ASI data
WPI deflators – 2004-05 used
Index of 6 core industries
26.7% weight – growth of 6.8% over previous year
Crude Oil, Petroleum Refinery Products, Coal, Electricity and
Cement and Finished Steel
Relevance of measure
Usefulness
Drawbacks
21. Relevant websites
www.labourbureau.gov.in
www.data.gov.in
www.indiabudget.nic.in
www.eaindustry.nic.in
www.rbi.org.in
For class tomorrow – readings on the RBI website –
money supply