The inflation can be best defined as a situation characterized by a sustained rise in the general price level observed over a period of time which may generate an expectation of a future rise also.
Inflation can also be defined as a reduction in the purchasing power per unit of currency because each unit of currency can buy now fewer goods and services.
Types of Inflation
Hyper Inflation
It is the situation in which the general price level rises very rapidly leading to such a drastic fall in the value of money (purchasing power) so that people lose faith in the currency and authorities may think in terms switching over to alternate currency or Barter System. For Example, The inflation rate in Zimbabwe on 14th November 2008 was 5473% on a monthly basis.
Stagflation
Stagnation + Inflation is coined term Stagflation. This term was first coined by Lain Macleod in his speech to the British parliament in 1965. It is a situation under which there is the coexistence of stagnation with inflation. under this, there is a high rate of inflation and along with the economic growth rate slow down and unemployment remains strictly high.
It raises a dilemma for economic policy since actions designed to lower inflation may boost unemployment and vice versa. Moreover in very simple terms it employes as economic slowdown which may technically be defined in an economy recording negative growth in two successive quarters.
Core Inflation
It means inflation which doesn’t take into account the impact of such factors that are beyond government control. Example: In inflation rate in India is calculated without taking into account the impact of rising in the prices of oil, then it will be core inflation.
Headline Inflation
It’s a measure of total inflation in an economy and is majorly affected by certain areas of the market which may experience sudden inflationary spikes. (An inflationary spike occurs when a particular section of an economy experiences a sudden price rise possibly due to external factor).
for example: If a large amount of crop is destroyed the value of remaining crops will rise sharply (This will distort the overall measure of inflation within the economy).
Depression
It is a situation characterized by extreme recession, extended for a longer period of time during which price may fall, the investment would fall and unemployment at its peak and business optimism is at its lowest level. such a situation was faced by the entire western Europe and USA during the 1929-1933 and known as a great depression of the 1930s.
Structural Inflation
This type of inflation is not caused merely by the excess of demand over supply but built into an economy due to the government’s monetary policy.
Disinflation
It means a decrease in the rate of inflation i.e. a slowdown in the rate of increase in the general price level of goods and services in a nation’s GDP over time.
Example – If the inflation rate in May was 8% and in the month of June it is 6%, it will be called a disinflation of 2%
Agflation
It means inflation led by the rise in the price of agricultural commodities. The word is a combination of the terms of agriculture and inflation.
Reflation
A fiscal or monetary policy designed to expand a country’s output and curb the effect of deflation. Reflation policy can include reducing taxes, changes in the money supply and reducing the interest rate.
Causes of Inflation
Demand Side Factor
Increase in salary, population increase, rise in expenditure of government, Increasing money supply, black money, etc.
Supply Side Factor
Hoarding, National Calamities, Bed monsoon and shortfall in production, Import cost-push factor, Speculation of Black marketing, Rise in excise duty, etc.
Inflation is a mix of both the demand and supply side.
Measures to Control Inflation
Monetary Policy Measures
Under this, the central bank of the country issues both quantitative as well as qualitative measures. For Example- RBI to control inflation had 13 consecutive increases by 375 basis points(3.75%) in various policy rates from March 2010 to October 2011.
Fiscal Policy
In a country like India monetary policy has a greater role than the fiscal policy because under fiscal policy prices can be controlled by reducing non-plan expenditure but expenditure reduction is tough because of political compulsions under the fiscal policy.
For Example, the government can reduce excise duty and import duty to moderate the price level. In 2012-2013 the import duty for wheat, onions, pulses were reduced to zero and for refined vegetable oils, it was reduced to 7.5%. moreover, the duty-free import of white or raw sugar was extended up to 30th June 2012. Presently the import duty on white sugar is 10%.
Administrative Measures
These are the most important in a developing country like India and also the most effective. These includes
- Strengthening the public distribution system and broadening its scope.
- Importing of Essential Commodities like sugar, wheat, rice, etc to manage the domestic shortfall.
- Enforcing measures like a ban on the export of certain essential commodities.
- Issuing strict warnings to speculators and to those who indulge in commodities.
- Imposing a ban on futures trading in essential commodities.
Measurement of Inflation Rate
The inflation in India is measured on the basis of two major Indexes (1) WPI (wholesale price Index) Base year 2004-05 and was reversed on 14th September 2010 and (2) CPI (consumer price Index) base year 2010 and is of 3 types i.e. urban population, Rural population, Combined.
Wholesale Price Index
It is used in India to measure the rate of inflation on a weekly basis and published by the office of the company advisor ministry of commerce and industry. WPI is constructed on the basis of 676 commodities, (earlier 435 before 2010) whose wholesale prices are collected on a weekly basis from major wholesale markets in India to arrive at this Index.
Inflation calculated on the basis of WPI is called point to point inflation i.e. inflation rate during a certain weak ending last year is compared to the corresponding week in the current year. WPI is purely a commodity Index and doesn’t include any service. Weight-age of various commodities in WPI
- Primary article:- 20.12%
- Fuel and power:- 14.19%
- Manufactured products:- 64.34%
Consumer Price Index
CPI measures change over time in the general level of prices of goods and services that household acquires for the purpose of consumption. CPI is calculated by the central statistical organization, which works under the Ministry of Statistics and Program Implementation (MoSPI). Currently, their Indexes or 3 types of CPI is calculated
CPI urban, CPI rural and CPI combined
These methods were adopted bt GOI on the recommendations of the C.Rangrajan committee, which replaced the earlier CPI of CPI(IW) Indian Worker, CPI non-manual urban worker, CPI urban workers, CPI rural workers. These new indexes are compiled at state basis, UT basis(Union territories)and all India basis. Weightage for various articles in the CPI is as follows –
| CPI (Rural) | CPI (Urban) | CPI (Combined) | |
| 1)Food Beverage and Tobacco | 59.31% | 37.15% | 49.71% |
| 2) Fuel and light | 10.42% | 8.40% | 9.49% |
| 3) clothing bedding and footwear | 5.36% | 3.91% | 4.73% |
| 4) Housing | 0 | 22.53% | 9.77% |
| 5) Miscellaneous | 24.91% | 28% | 26.31% |
A total number of 200 goods and services are taken into account while calculating the CPI.
Consequences of Inflation
- Greater Uncertainty
- The lower amount of savings
- Damage to export competitiveness
- social unrest
- Interest rate
- Redistributed effects
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