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Inflation and its causes
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This lesson explains the concepts of inflation and deflation

## Awdhesh Singh is teaching live on Unacademy Plus

Awdhesh Singh
Director, AwdheshAcademy.com, An E-learning platform for Civil Services, Schools, GST etc., IITian, Former IRS Officer CSE-1989 rank 272

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1. Inflation and Deflation Dr Awdhesh Singh, IRS (Retd.) Director, Awdhesh Academy, Former Commissioner, Customs & Indirect Taxes (Central Excise/GST)

2. Definition of Inflation Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. Inflation indicates a decrease in the purchasing power of a nation's currency As prices rise, they start to impact the general cost of living for the common public and the appropriate monetary authority of the country, like the central bank, then takes the necessary measures to keep inflation within permissible limits and keep the economy running smoothly.

3. Deflation Deflation is the opposite of inflation which indicates a general decline occurring in prices for goods and services. It happens when the inflation rate falls below O percent.

4. Example of Inflation Imagine your father stuffed a T 100 note to you in 1990 when the petrol price was R 5 per litre. It means you could have then bought 20 litre of petrol with 100 In 2018, the cost of petrol is around 80 per litre. Hence, you can buy only 1.25 litre of petrol with this money. Thus although the 100 note remained the same for its value, it lost its purchasing power over the period This example explains how money loses its value over time when prices rise.

5. Example of deflation It is not necessary that prices always rise with the passage of time. They may remain steady or even decline. -For instance, the cost of an AC of 1.5 Ton was 40,000 in 1990 which has declined to 20,000 in 2018. In this case, the purchasing power of the Rupee increased over the period as the price of commodity declined

6. Measurement of Inflation Depending upon the selected set of goods and services used, multiple types of inflation values are calculated and tracked as inflation indexes. Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI)

7. Inflation Trend in India .Annual consumer inflation in India declined to 2.33 percent in November of 2018 from an upwardly revised 3.38 percent in October and below market expectations of 2.8 percent. It is the lowest inflation rate since June of 2017 as food prices fell the most since the series began in 2012. . The Reserve Bank of India revised down its inflation forecasts to 2.7 percent-3.2 percent for the period Oct 2018-March 2019 Inflation Rate in India averaged 6.37 percent from 2012 until 2018, reaching an all time high of 12.17 percent in November of 2013 and a record low of 1.54 percent in June of 2017.

8. Global Inflation Trends World Ere America Asia Africa Australia G20 Country Last 48.00 1.90 3.75 1.70 1.90 1.60 1.60 1.70 2.33 3.13 PreviousS Nov/18 Sep/18 Dec/18 Nov/18 Dec/18 Dec/18 Dec/18 Dec/18 Nov/18 Dec/18 Range 20263:-7 23.9-1.3 6821 1.65 21.6:-17.8 28.4:-2.2 5:-0.7 18.8-0.7 11.54 7.62 12.17 1.54 82.4:-1.17 Argentina 45.5 Australia 4.05 2.4 2.2 1.9 1.9 2.3 3.38 3.23 Brazil Canada China Euro Area France Germany India Indonesia

9. The Good Aspects of Inflation Most economists argue that some inflation is a good thing. *A healthy rate of inflation is considered to be approximately 2-3% per year. The goal is for inflation (which is measured by the Consumer Price Index, or CPI) to outpace the growth of the underlying economy (measured by Gross Domestic Product, or GDP) by a small amount per year. A healthy rate of inflation is considered a positive because it results in increasing wages and corporate profitability and keeps capital flowing in a presumably growing economy. As long as things are moving in relative unison, inflation will not be detrimental .Small amounts of inflation is that it encourages consumption as the consumer don't postpone their decisions of buying. Higher consumption in turn stimulate the economy and create more jobs.