2. What is Inflation?
Related Terms
Types of Inflation
Measurement of Inflation
Stages of Inflation
Inflation Accounting
Causes
Effects
Costs of Inflation
Relation with GDP, Currency
Measures to keep inflation in check
Indian Economy & Inflation
Conclusion
3. Inflationis a sustained
increase in the general
level of prices of goods
and services in an
economy over a period
of time.
decreasein purchasing
power of money.
4. 1956 Commodities 2011
(Rupees (Rupees
Per Kg) Per Kg)
.30 Rice 32
.25 Wheat 35
3 Almonds 350
.20 Potato 16
6. Related to basic economic
principles of supply and demand :
Increase in the money supply.
Increase in the aggregate demand
for goods and services.
Commercial Policies
Deficit Financing
Banking policies
Increasing costs of production
Anti – social activities
9. Demand Pull Inflation Cost Push Inflation
Increase in aggregate Cost push inflation
Demand succeeds Demand-pull
inflation
More money chases
relatively less quantity Demand for factors of
of goods and services Production increases
excess of demand Prices are “pushed up”
pushes up the prices of by increase in costs of
goods and services factors of production
10. Goods that are
representative of the
economy are put together
market
basket
11. Adopted by countries such as India,
Philippines etc
Uses 435 commodities for inflation
calculation which represent various strata of
the economy
It is calculated on a base year and In India
base year is 2004-05
WPI = Base yr price (Rs 100) + rate of
increase in price from base yr till the yr
under consideration
12. Weighted average of 435 commodities to
arrive at overall WPI
Weights depend on the commodities
influence on economy
(WPI of end of year – WPI of beginning of
year)/WPI of beginning of year x 100
For example, WPI on Jan 1st 2010 is 106 and
WPI of Jan 1st 2011 is 109 then inflation rate
for the year 2010 is
(109 – 106)/106 x 100 = 3.42%
13. Adopted by countries such as USA, UK, Japan and
China.
commodities for inflation calculation are the
goods and services purchased by a “typical
consumer”
For instance, in January 2007, the U.S. Consumer
Price Index was 202.4, and in January 2008 it was
211
(211.08-202.41)/202.41*100 = 4.28%
14. Index prices are expressed in relation to the
base year price
Modifying the weights assigned to the goods
New products may be introduced, older products
disappear but both the sorts of goods are
included in the "basket“
Inflation numbers are often seasonally adjusted
May focus only on certain kinds of prices,
or special indices
16. Adjusting the financial statements as per the
changes in the purchasing power of money.
Two ways of restatement/adjustment
Accounting for Current purchasing power of
rupee
Current cost accounting
17. Wholesale price index of RBI is used
Distinction between Monetary and Non-Monetary
items
Only Non-Monetary items need to be restated
Ex : Investments were made at a cost of Rs 6L in
July 2005 and price index was 300.
On 31st Mar 2011 price index is 320 and market
value of investment is 6,10,000/-
Loss = Cost – Market value
6L*320 = 6.4L 6.1L
300
Loss= 30,000/-
18. Takes into account the price changes
relevant to the particular firm/Industry and
not economy as a whole
Important features
Fixed assets are shown at their current value
Stocks are shown at the value of their
business
Depreciation is calculated on current values
Difference between current values and
depreciated costs of FA is transferred to
revaluation reserve a/c
19. Depreciation adjustment
Particulars Historical Cost Current Cost
Accounting Accounting
Value of the asset 50,000 1,00,000
Current depreciation 5,000 10,000
Accumulated dep (Op bal) 15,000 30,000
Total accumulated dep 20,000 40,000
Balance sheet value (WDV) 30,000 60,000
Backlog depreciation
= 1,00,000-60,000-(15,000+10,000) = 15,000
Should be charged to revaluation reserve
20. Effects on production Distributional effects Other effects
Misallocation of Debtors and
resources Government
creditors
Reduction in Business Balance of
saving community payments
Hinders foreign Fixed Income
capital groups Exchange rate
Investors Social
Farmers
22. International competitiveness
Confusion and Uncertainty
Shoe leather costs
Income redistribution
Boom and Bust Economic Cycles
Cost of Reducing Inflation
Fiscal Drag
23. People spend more and GDP increases
“The Slippery Slope”
Too much of GDP growth is dangerous as it leads
to increase in inflation
If GDP was calculated to be 6% higher than the
previous year, but inflation was measured 2%
then the GDP rate to be reported is 4%
GDP figures are reported after adjusting for
inflation.
24. Relationship between inflation and interest
rates for a particular currency decide whether
or not that currency is growing stronger or
weaker
Buying power Increase the
Increase in money Prices will
of money is bank interest
supply increase
eroded rates
25. Zimbabwe’s inflation was
1,00,000% in 2008 and was
recorded as highest in the
world !!!
1USD = 25 million Zimbabwean dollar
Issued a 100 trillion Zimbabwe dollar note
Excess Supply of Money which is not supported by
growth of Output of Goods and Services
26. It is neither high nor steady
Despite high inflation and colossal corruption
patterns - India overcame the reparation done by
global recession with little slower growth rate
The latest data of the government food price index
shows they jumped almost 17% last financial year
Inflation, interest rates, fiscal deficit, current
account deficit and depreciation of local currency
could be the reason for slowing down the economic
growth
28. Combined Consumer Price Inflation stood at an
annual 7.65%
This was the first time Consumer Price Inflation
Data released by CSO
Government had been relying on WPI data which
economists say, does not capture the inflation
situation fully
Globally, Central Banks and Policy Makers rely on
CPI Data
29. Oils, milk and milk products, Fruits, Clothing, fuel
continued to remain stubborn.
Vegetables Prices declined an annual 24.87%
Economists said its difficult to draw any conclusion
from the CPI data – lacks history
RBI has raised interest rates 13 times since march
2010 to tame price pressures
CPI data showed that inflation continues to remain
firm
30. Monetary Fiscal Measures Other Measures
Policies • Reduction in • Increase in
• Issue of New Public Expenditure Production
Currency • Increase in Taxes • Proper commercial
• Cash Reserve Ratio • Increase in policy
• Bank Rate of Imports • Encouragement to
Interest • Decrease in saving
Exports
31. You now know that inflation isn't basically good
or bad.
When inflation goes up, there is a decline in the
purchasing power of money.
Variations on inflation include deflation and
stagflation.
Two theories as to the cause of inflation are
demand-pull inflation and cost-push inflation.
Lack of inflation is not necessarily a good thing.
Inflation is a serious problem for fixed income
investors.