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  1. INFLATION AND DEFLATION BY Dr.Neerja Sharma City Premium College ,Nagpur
  2. Introduction • Inflation happens when the price of goods and services increase, while deflation takes place when the price of the goods and services decrease in the country. Inflation and deflation are the opposite sides of the same coin. • Maintaining the balance between these two economic conditions, i.e. inflation and deflation is essential as the economy can quickly swing from one condition to the other as a result of these two conditions. The Reserve Bank of India keeps an eye on the levels of price changes and controls deflation or inflation by conducting monetary policy, such as setting interest rates in India.
  3. Inflation • Inflation is the rate at which the prices for goods and services increase. Inflation often affects the buying capacity of consumers. Most Central banks try to limit inflation in order to keep their respective economies functioning efficiently. There are certain advantages as well as disadvantages to inflation. • Inflation refers to the increase in the prices of the goods and services of daily use, such as food, housing, clothing, transport, recreation, consumer staples, etc. Inflation is measured by taking into consideration the average price change in a basket of commodities and services over a period of time. Inflation is calculated in India by the Ministry of Statistics and Programme Implementation. • A simple example would be, suppose a kg of apple cost Rs.100 in 2019 and it cost Rs.110 in 2020, then there would be a 10% increase in the cost of a kg of apple. In the same way, many commodities and services whose prices have raised over time are put in a group and the percentage is calculated by keeping a year as the base year. The percentage of increase in prices of the group of commodities is the rate of inflation.
  4. Summary of the main causes of inflation • Demand-pull inflation – aggregate demand growing faster than aggregate supply (growth too rapid) • Cost-push inflation – For example, higher oil prices feeding through into higher costs. • Devaluation – increasing cost of imported goods, and also the boost to domestic demand. • Rising wages – higher wages increase firms costs and increase consumers’ disposable income to spend more. • Expectations of inflation – High inflation expectations causes workers to demand wage increases and firms to push up prices.
  5. Types of inflation
  6. Effects of inflation on society and politics • In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates. • Government Finance: During the period of inflation, government revenue will increase as more income is obtained from income tax, sales tax, consumption tax, etc. Similarly, as the government needs to spend more and more money for administrative and other purposes, public spending will increase.
  7. Causes of Inflation and Deflation Increase in aggregate supply Decrease in aggregate supply Increase in public expenditure Less production Deficit financing Artificial scarcity Cheap monetary policy Taxation policy Increase in investment Shortage of food grains Black money Industrial Disputes Reduction in Taxes Technical change Less public Borrowings Lack of raw materials Natural clamities
  8. Deflation is Considered Inexpedient on the Following Grounds: Deflation, by reducing prices and production, results in a marked decline in the national income of the country. The country becomes poorer than before. By leading to a fall in production, deflation causes a marked increase in unemployment. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future