Inflation - An overview

Inflation 

A general price rise sustained over a period of time.

http://www.thehindu.com/business/ready-reckoner-what-isdeflation-and-is-it-bad/article7692832.ece

Type of Inflation	Cause
Inflation	Price Rise
Deflation	Fall in general level of prices
Stagflation
Reflation

Causes of Inflation

Demand-Pull

depends on the money supply (available money ) in the system. This can be measured as below -

• Keynesian school (favours lowering demand)
• goods in short supply are imported or not exported
• wage revision
• interest on loans are raised
• Monetarism school
• monetary policy tool for proper money supply

Cost-Push

• Keynesian School
• reducing excise duties on raw materials
• wage revision
• Monetarism school
• monetary policy tool for proper money supply

monetary policy tools does not work if price rise is taking place in items of everyday use.

monetary policy tools are used by RBI where other (fiscal) measures are used by govt. (Box 4.2 of economic survey 2012-13)

Inflation Types

1. Low
2. Galloping
3. Hyperinflation

Other Terms/Concepts
Reflation
Stagflation


Measuring Inflation

1. By price indices such as WPI or CPI
2. By help of GDP deflator method

Effects of Inflation

1. Redistributes wealth from creditors to debtors
2. Lending institutions suffer
3. shows a rise in demand
4. Investment is boosted in the short run because
1. higher inflation suggests higher demand
2. cost of loan is lowered
5. shoe leather cost of inflation
6. on tax
7. on ex
8. export segment benefits by volume
9. imports become costlier
10. on trade balance
11. increases employment in the short run (Philips curve)
12. increases nominal value of wages while real value falls (dearness allowance)

Comfort Zone of Inflation - Inflation Targeting as part of monetary policy

Further Reading

1. Mrunal article

2. Ramesh Singh