Inflation and our Economy

What is Inflation?

Inflation is a Rising in Prices or decrease in Purchasing power. The rate at which purchasing power decreases can be seen in the average Price increase of a Basket of selected Goods and Services over some time.

The rising in Prices, which is often expressed as a Percentage, means that a unit of Currency is effectively biased less than it did in the Prior Period.

Inflation can be constructed with Deflation, which occurs when Prices decline and Purchasing power increases.

While it is easy to measure the Prices that Changes in individual Product over time, Human needs extend beyond just one of two Products.

Individuals need a big and diversified set of Products as well as a host of Services for living a Comfortable life  They include, Goods Food Grains, Metal, Fuel, Utilities like Electricity and Transport, and Services like Healthcare, Entertainment, and Labour.

Inflation and our Economy

Causes of Inflation

An increase in the Supply of Money is the root of Inflation, through this can play out through different Mechanisms in the Economy. The Money Authorities can increase Money Supply by:

• Printing and Giving away More Money to the citizens.
• Giving away More Money to citizens.
• Legally Devaluing Legal Tender Currency.
• Loaning New Money into Existence as Reserve Account credits through the Banking System by Purchasing Government Bonds from Banks on the Secondary Market.

Types of Inflation

Inflation can be classified into three types:

1. Demand-Pull Inflation

• Cost-Push Inflation

3. Built-in inflation

Explanation

1. Demand-Pull Inflation:

It occurs when an Increase in the Supply of Money and Credits stimulates the Overall Demand for Goods and Services to increase more rapidly than the Economy’s Productions Capacity. These decreases lead to Price rises.

When People have more money, it leads to Positive consumer sentiment. This leads to higher spending which Pulls Prices higher. It creates a Demand Supply Gap with higher Demand and less Flexible Supply which results in higher prices

2. Cost-Push Inflation:

 Itis a condition in which the cost of labour or raw materials goes up and causes an increase in prices for goods and services. Cost-push Inflation is unlikely to occur unless demand for the affected products remains steady or is growing.

Inflation in the economy damages the breaking down of consumers’ purchasing power unless wages keep up with the increase in prices.

3. Built-in-Inflation:

 It results from Future Expectations of Inflation. High Wages result in increased cost of Production, which in turn has an impact on Product Pricing. Due to Inflation, and increased cost of living higher wages can afford.

Main causes of Inflation

• Monetary Policy: Monetary Policy determine the supply of currency in the country. Excess supply of currency leads to Inflation.

• Fiscal Policy: Fiscal Policy determines the takeand spending of the economy. If higher borrowings lead to an increase the Taxes and more printing to repay the debt.

• Demand-Pull inflation: Increases in Prices due to the gap between demand and supply.

• Cost-Pull Inflation: For the increased cost of Production there are higher prices of Goods and Services.

• Exchange Rates: Fluctuations in the exchange rate have an impact on the rate of Inflation.

• How to Control Inflation?

Measures to Control Inflation

The government takes different measures to control inflation of different types as explained below:

Demand-Pull Inflation Control:

To control demand-pull inflation, the Govt. undertakes some monetary measures and incorporates certain changes to the fiscal policy.

Monetary measures

One of the commonly used measures to control inflation is controlling the money supply in the economy. If the Government decreases the supply of money, then the demand will fall, leading to falling in prices.

Fiscal Measure:

A Country's Fiscal Policy has two essential components Government Revenue and Expenditure. When the aggregate demand exceeds the aggregate supply, an inflationary gap rises. As result, the government can take the fiscal measure to control the inflation

Take steps to decrease the overall expenditures and transfer payments.

Increase the rate of taxes causing individuals to decrease their total expenditure, leading to a decreasing demand and drop in the money supply in the economy

Cost-Push inflation:

To control Cost-Push inflation, the government uses direct control measures. These include steps like freezing the wages of workers and putting upper limits on the prices of important inputs like electricity, coal and steel etc.

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