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Vikas Kumar Singh Tomar

In this we will discuss All About Inflation and Related Terminologies for UPSC/SSC/BANKS etc in a very interesting teaching methods with proper explanations and with propers statics 
Because All About Inflation
INFLATION

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(Hindi) All About Inflation and Related Terminologies for UPSC/SSC/BANKS etc

Socio-Economic Issues

Indian Economy

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Economy

Socio-economic Issues

Definition of Inflation
Inflation is basically a rise in prices.
A more exact definition of inflation is a situation of a sustained increase in the general price level in an economy. Inflation means an increase in the cost of living as the price of goods and services rise.
Inflation and value of money

Inflation leads to a decline in the value of money. “Inflation means that your money won’t buy as much today as you could yesterday.”
The inflation rate is the annual percentage change in the price level.

Definition and Meaning Of Inflation In Simple Word (in Hindi)

Inflation is the increase in general level of prices of goods and services, hence reducing the purchasing power.

Causes:

Increase in demand: When the demand of goods or services increases its price also increases. This type of inflation is called demand pull inflation . This can be caused due to the following:
Population pressure: This will lead to a situation when too much money will be chasing very few goods.
Reduction in supply: supply unable to meet demand and this increase the price of goods
Natural calamities.
Deficit financing or increase in money supply due printing of currencies or loans breeds inflation
Increase in government expenditure: more government spending will lead to more money in hands of public hence greater purchasing power.
Black money
Increases in wages/salary will increase the disposable income hence demand increase and so does price.
Cost push inflation: increase in cost of goods which can be dur to scarcity or other reasons pushes inflation. Some of the reasons are

Increase in wages: this leads to more cost of production hence more prices. This can also cause demand pull inflation
Increase in taxes: tax increases means more selling price
Infrastructural bottlenecks: power supply,land , transportation costs or other factors
Output and supply fluctuations: in India agriculture is an example as it depends on season.
Increase in administered price
Increase in import prices, pushes up domestic prices.
Terms Related to Inflation

The important terms related to inflation are as follows :-
Deflation : Deflation is a condition of falling prices. It is just the opposite of inflation. In deflation, the value of money goes up and prices fall down. Deflation brings a depression phase of business in the economy.
Disinflation : Disinflation refers to lowering of prices through anti-inflationary measures without causing unemployment and reduction in output.
Reflation : Reflation is a situation of rising prices intentionally adopted to ease the depression phase of the economy. In reflation, along with rising prices, the employment, output and income also increase until the economy reaches the stage of full employment.
Stagflation : Paul Samuelson describes Stagflation as the paradox of rising prices with increasing rate of unemployment.
Stagnation : Stagnation in the rate of economic growth which may be a slow or no economic growth at all.
Statflation : The term 'Statflation' was coined by Dr. P.R. Brahmananda to describe the inflationary situation of India. According to Brahmananda, Rising prices in the middle of a recession is known as Statflation.

Causes and Stages of Inflation (in Hindi)

Inflation is generally controlled by the Central Bank and/or the government. The main policy tools to control inflation include:

Monetary policy – Setting interest rates. Higher interest rates reduce demand, leading to lower economic growth and lower inflation
Control of money supply – Monetarists argue there is a close link between the money supply and inflation, therefore controlling money supply can control inflation.
Supply-side policies – policies to increase competitiveness and efficiency of the economy, putting downward pressure on long-term costs.
Fiscal policy – a higher rate of income tax could reduce spending and inflationary pressures.
Wage controls. Trying to control wages could, in theory, help to reduce inflationary pressures. However, apart from the 1970s, rarely used.

Measures to Control Inflation (in Hindi)

(1) Effects on Production, (2) Effects on Distribution, (3) Debtors and Creditors, (4) The Entrepreneurs, (5) Investors, (6) Farmers, (7) Wage Earners, (8) Middle Class and Salaried Persons, (9) Government, and (10) Public Moral.

1. Effects on Production:

Keynes felt that as long as there were unemployed resources in the economy a moderate or a mild dose of inflation might be in order; because this would lead to waves of optimism inducing businessmen to invest more.

But this cannot go on forever because the limit is set by full employment ceiling, after which the prices start rising and moderate inflation starts assuming the nature of hyper-inflation which, in turn, has disastrous consequences on production. It distorts the smooth functioning of price mechanism, hinders capital formation, stimulates speculative activities and hoarding, leads to misallocation of productive resources.

In short, inflation invites business to seek profits via manipulation of markets rather than via efficient production.

2. Effects on Distribution:

Inflation has the effect of redistributing income because prices of all factors do not rise in the same proportion. Entrepreneurs stand to gain more than wage earners or fixed income groups. Speculators, hoarders, black marketers and smugglers stand to gain on account of windfall profits.

Changes in the value of money also result in the redistribution of wealth partly because during inflation there is no uniform rise in prices and partly because debts are expressed in terms of money. Inflation is a kind of hidden tax, steeply regressive in character and in effects. This redistribution of wealth as a result of inflation puts more burden on those groups of the economy which are least able to bear it.

3. Debtors and Creditors: Debtors borrow from creditors to pay the latter along with the rate of interest at some future date. Changes in the price level affect them differently at different times. During inflation when the prices rise (and the real value of money goes down), the debtors pay back less in real terms than what they had borrowed, and thus, to that extent they are gainers. On the other hand, the creditors get less in terms of goods and services than what they had lent and stand to lose to that extent. During the period of deflation, however, when prices fall (and the real value of money rises), creditors stand to gain and debtors lose.

4. The Entrepreneurs:

When prices rise, producers, traders speculators and entrepreneurs stand to gain on account of windfall profits because prices rise at a faster rate than cost of production, besides, there is time-lag between the two. Moreover, they gain because the prices of their inventories (stock) go up.

Again, they generally being borrowers of money for business purposes, stand to gain. On the other hand, falling prices heavily reduce the profits on account of the fact that wages fail to fall along with the fall in the prices. Entrepreneurs, therefore, react to it by curtailing the volume of production and hence employment goes down generating a full-fledged depression.

5. Investors:

Different kinds of investors are affected differently by inflation and deflation. One can invest in bonds and debentures which yield a fixed rate of interest income or one can invest in real estate or equities (shares) whose returns (dividends) rise and fall with profits earned by the companies concerned. When prices rise, the returns on equities go up on account of the rise in profits, while the bonds and debenture-holders gain nothing as their incomes remain fixed.

On the other hand, equity-holders will lose during depression on account of a fall in the price level, while the debenture- and bond-holders gain. To the extent investors are able to diversify their investment, they can protect themselves from the effects of the fluctuation in prices.

6. Farmers:

Farmers gain during inflation. The prices of farm products go up and the cost incurred by them (like interest and taxes) either remain constant or do not increase much, at any rate i.e., costs lag behind prices received by the farmers. In India, during war and post-war period, farmers were able to pay-off their old debts on account of high prices of their products because of inflation. Moreover, farmers are generally debtors and have to pay less in real terms, while the land revenue and taxes etc., do not rise much. Thus, farmers stand to gain during periods of inflation.

7. Wage Earners:

Wage-earners generally suffer during inflation, despite the fact that they obtain a wage rise according to a rise in the cost of living index. However, wages do not rise as much as the rise in prices of those commodities, which the workers consume. Further, there is a lag between a rise in the price level and a rise in wages. If the workers are organized, they may not suffer much during inflation but if they are unorganized like the agricultural labourers, they may suffer more, as they may not find it easy to get their wages increased. Similarly, in deflation the real value of the money wages received by them increases and they may gain a little.

8. Middle Class and Salaried Persons:

The hardest hit are the persons who receive fixed incomes, usually called the middle class. Persons who live on past savings, fixed interest or rent, pensioners, government employees, teachers etc., suffer during periods of rising prices as their incomes remain fixed. Kemmerer remarked: “The middle class, however, which by hard work and thrift has built up a fund of saving to educate its children and to provide a livelihood for times of sickness and for old age, finds itself in a desperate situation in a time of serious inflation.” During deflation, however, middle class is able to get some relief on account of falling prices and rising value of money.

9. Government:

In a mixed economy, the public sector is affected by fluctuations in price level. As prices rise, the government has to spend more on goods and services including raw materials for carrying through their project. Estimates are revised and taxes are raised. On the other hand, when prices fall, the government sector or the public sector has to incur less costs.

10. Public Moral: Inflation results in arbitrary redistribution of wealth favoring businessmen and debtors and hurting consumers, creditors, petty shopkeepers, small investors and fixed income earners. This lowers the public moral. The ethical standards and the public moral had fallen to miserably low levels during the period of hyper-inflation in Germany.

Effects of Inflation (in HIndi)

There are several ways to measure inflation. On the basis of population coverage, the inflation indices are developed to understand the levels of inflation for certain sets of population such as consumers, producers, retailers, wholesalers etc. Such indices are called Consumer Price Index (CPI), Producer Price Index (PPI), Wholesale Price Index (WPI) etc. On the basis of items, the inflation indices are developed to understand the levels of inflation for certain sets / baskets of items. Since the prices of some items are more volatile than others like food and fuel, it might give conflicting signals to policymakers as the overall inflation could change because of a selected few goods. Hence, separate indices can be developed separating the volatile items from the main index.  This gives rise to concepts of Headline inflation and core inflation whereby, the Headline inflation includes all the items and core inflation usually excludes food and fuel items. There is another variant of core inflation called mean inflation. In this, the components that show the most extreme monthly price changes are excluded.
Contents [hide]
Inflation Indices
Wholesale Price Index
Base Year
Items
Consumer Price Index
Base Year
Number of items
Key differences between WPI & CPI
GDP Deflator
Inflation Indices
In India, Consumer Price Index (CPI) and Wholesale Price Index (WPI) are two major indices for measuring inflation. In United States, CPI and PPI (Producer Price Index) are two major indices.
The Wholesale Price Index (WPI) was main index for measurement of inflation in India till April 2014 when RBI adopted new Consumer Price Index (CPI) (combined) as the key measure of inflation.
Wholesale Price Index
Wholesale Price Index (WPI) is computed by the Office of the Economic Adviser in Ministry of commerce & Industry, Government of India. It was earlier released on weekly basis for Primary Articles and Fuel Group. However, since 2012, this practice has been discontinued. Currently, WPI is released monthly.
Salient notes on WPI are as follows:
Base Year
Current WPI Base year is 2004-05=100. Its worth note that the base year for CPI is 2012 currently. This is one reason for increasing difference between CPI and WPI in recent times.
Items
There are total 676 items in WPI and inflation is computed taking 5482 Price quotations. These items are divided into three broad categories viz. (1) Primary Articles (2) Fuel & power and (3) Manufactured Products, as shown in below table:

For your examinations, you may note down the below observations:
The decreasing order of three groups of items in terms of weightage is manufactured products>primary articles >fuel & power
Total weightage of food items and products {sum of the two} is around 30.
Among manufactured products, the highest weightage is of chemicals and chemical products.
We note here that WPI does not take into consideration the retail prices or prices of the services.
Consumer Price Index
Consumer Price Indices (CPI) released at national level are:
CPI for Industrial Workers (IW)
CPI for Agricultural Labourers (AL)/ Rural Labourers (RL)
CPI (Rural/Urban/Combined).
While the first two are compiled and released by the Labour Bureau in the Ministry of Labour and Employment, the third by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation.
In India, RBI uses CPI(combined) released by CSO for inflation purpose. Important notes on this index are as follows
Base Year
Base year for CPI (Rural, Urban, Combined) is 2012=100.
Number of items
The number of items in CPI basket include 448 in rural and 460 in urban. Thus, it makes it clear that CPI basket is broader than WPI basket. The items in CPI are divided into 6 main groups as follows:
Item Group	Weight-age
Food and beverages	54.18
Pan, Tobacco and Intoxicants	3.26
Clothing & Footwear	7.36
Fuel & Light	7.94
Miscellaneous	27.26
Total	100
Key differences between WPI & CPI
Primary use of WPI is to have inflationary trend in the economy as a whole. However, CPI is used for adjusting income and expenditure streams for changes in the cost of living.
WPI is based on wholesale prices for primary articles, administered prices for fuel items and ex-factory prices for manufactured products. On the other hand, CPI is based on retail prices, which include all distribution costs and taxes.
Prices for WPI are collected on voluntary basis while price data for CPI are collected by investigators by visiting markets.
CPI covers only consumer goods and consumer services while WPI covers all goods including intermediate goods transacted in the economy.
WPI weights primarily based on national accounts and enterprise survey data and CPI weights are derived from consumer expenditure survey data.
GDP Deflator
The most comprehensive measure is GDP deflator which is measured as ratio of GDP (Gross Domestic Product) at current prices to GDP at constant prices. Since it encompasses the entire spectrum of economic activities including services, the scope and coverage of national income deflator is wider than any other measure. This data is released by the Central Statistical Organisation (CSO) but is not used as it comes quarterly and with a 2 month lag.

Methods Of Calculating Inflation {WPI,CPI,IIP etc} (in Hindi)

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Definition and Meaning Of Inflation In Simple Word (in Hindi)

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Causes and Stages of Inflation (in Hindi)

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Measures to Control Inflation (in Hindi)

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Effects of Inflation (in HIndi)

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Methods Of Calculating Inflation {WPI,CPI,IIP etc} (in Hindi)