The document defines various economic terms related to inflation including inflation, hyperinflation, deflation, and stagflation. It also discusses how inflation is measured using the Consumer Price Index and some of the key causes of inflation such as increases in the money supply, cost pressures, and demand factors. The impacts of inflation on employment, incomes, and the overall economy are also outlined.

2. Inflation
• Definition:
– Is a steady an upward
movement in the level of
prices decreasing
purchasing power over a
period of time, usually
one year.
2

3. Hyper inflation
• Extremely rapid or
out of control
inflation.
• Hyperinflation is a
situation where
the price increases
are so out of control
that the concept of
inflation is
meaningless.

4. Deflation
• A general decline in prices, often
caused by a reduction in the supply
of money or credit.
• Deflation can be caused also by a
decrease in government,
personal or investment spending.
• The opposite of inflation, deflation
has the side effect of increased
unemployment since there is a
lower level of demand in the
economy, which can lead to an
economic depression.

5. Stagflation
• A condition of slow
economic growth and
relatively high
unemployment - a time
of stagnation -
accompanied by a rise in
prices, or inflation.
• Stagflation occurs when
the economy isn't
growing but prices are,
which is not a good
situation for a country to
be in.

6. How to measure inflation?
• The rate of price inflation in an economy is
measured by calculating the average
percentage change in the price of all goods
and services, from one point in time to
another, say one month/year.

7. Measuring Inflation
• The Consumer Price Index (CPI) is the official
measure of inflation.
7

8. Measuring Inflation
• The CPI can be thought of as an
imaginary ‘basket’ of selected
goods and services bought by a
typical capital city household.
• The CPI is merely a measure of the
changes in the price of this basket
of goods and services.
8

9. Measuring Inflation
• The price of the CPI
basket in the base (first)
period is given a value of
100 and the prices of
subsequent periods are
compared against the
base year.
9

10. Measuring Inflation
• For example, if the price of the basket had
increased 15% since the base year, the CPI
would read 115, if the price had fallen by 15%
since the base year the CPI would be 85.
10

11. Uses of CPI data
• As an economic indicator:
• Measure of changes in cost
of living.
• Govt. can control price
inflation using macro
economic policies.
• Workers seek increase in
wages by looking at the
CPI.
• Entrepreneurs makes
business decision…

12. Uses of CPI data
• As a price deflator:
• Rising prices reduce
purchasing power or real
value of money.
• CPI is used to deflate
these values and
calculate real or inflation-
free values.
• Eg: Wage increased by
10%; price inflation is
15%; then the real value
of wages fallen by 5%

13. Uses of CPI data
• Indexation:
• Indexation involves tying
certain payments to the rate
of increase in CPI.
• Ex: pensions indexed with
CPI means they increase by
the rate of inflation.
• Other examples: Savings,
threshold of income tax etc

14. Types of goods and Proportion of Average price of Weighted average
services weekly income goods and services price
spent on each
category
Travel and Leisure 15% $20.00 0.15x$20.00=$3.00
Household goods 25% $40.00
and services
Clothing and 40% $30.00
footwear
Transport 20% $25.00
Total 100%

15. How to calculate CPI
Types of goods and Proportion of Average price of Weighted average
services weekly income goods and services price
spent on each
category
Travel and Leisure 25% $22.00 0.25x$22.00=$5.50
Household goods 25% $46.00
and services
Clothing and 35% $38.00
footwear
Transport 15% $20.00
Total 100%

16. Problems with price indices
• Over time, “typical” household
and “basket” of goods will tend
to change.
• Over time, quality of goods and
services and sources of purchase
also may change.
• International comparison is
difficult.(household composition
and spending patterns differ
between countries)
• Exclusion of food, energy, house
prices and income taxes may
give only inaccurate data.

17. What causes inflation?
1. Over money supply:
• “Too much money chasing
too few goods.”
• People are able to increase
their spending on goods
and services faster than
producers can supply
goods and services they
want to buy.

18. • Govt. may allow the supply of money to
increase by:
 A. issuing more notes and coins
 B. Allow banking system to create more credit
• Govt. may expand the money supply:
 To increase total demand and reduce unemployment.
 In response to an increase in demand for G & S
 In response to demand for higher wages and rise in cost
of production.

21. What causes inflation?
• 2. Monetary rule:
• If the government wants
to keep inflation low and
stable, it should allow
the supply of money to
expand at the same rate
as the increase in real
output or real GDP over
time.

22. What causes inflation?
• 3. Government policy:
Measures to boost demand
and to reduce unemployment,
governments allow money
supply to expand.
• Inflation reduced
purchasing power
Demand for higher wages
unemployment =

23. What causes inflation?
• 4. Demand-pull Inflation:
Inflation caused by increase
in total demand is called
demand-pull inflation. In
aggregate demand
borrowing/issue of new
currency more money
supply Inflation

24. What causes inflation?
• 5. Cost push inflation:
• Inflation caused by
higher cost feeding into
higher prices is called
cost-push inflation.
• Wage-price spiral: As
price demand for
wages cost
price.

25. Wage- Price Spiral

26. Fill in the blank boxes to complete the
wage-price spiral

27. What causes inflation?
• 6. Imported inflation: Rising
prices in one country may be
exported to other countries
through international trade.
This is called imported
inflation. A fall in the value of
one currency against another
currency can also lead to
imported inflation.($1=Rs.50)
falls to ($1=Rs.25)
• ($10 worth import now costs
$20)

29. Money income Vs Real income

30. Rising prices reduce the purchasing power of people’s
incomes.(Their real income falls)
Pensioners & Government employees(fixed income
group)
Professional people and workers in strong trade
unions.(better bargaining power)
People who save money(If interest rate is rate of
inflation becomes worse off)
Old age pensioners other fixed income earners
Government earns more tax revenue.

31. Cost of inflation to the economy
• Inflation causes
unemployment.
o People save more in times of high
inflation.
o More imports and less exports.
• Reduction in the real value of
savings
• International competitiveness

32. Employment
• Employment provides people
with income and wealth.
• Unemployment wastes
productive resources. Hence:
• Governments always wants to
maintain a high and stable
level of employment.

33. Employment Indicators
Labour force Employment Employment Unemploym
Labour participation by industrial status ent
force rate sector

34. Key Employment Indicators
• Labour force: Total number of people of working age in
work or actively seeking work
• Labour force participation rate: The labour force as a
proportion of the total working age population.
• Employment by industrial sector: How many people
work in agriculture and manufacturing industries,
relative to services.
• Employment status: The number of people employed
full-time, part time or temporary work.
• Unemployment: The number of people registered as
being without work, and as a proportion of the total
labour force(the unemployment rate)

35. Labour force
• They exclude:
• They include:

36. Labour force participation
• Labour force participation rate
is the measure of the
proportion of working-age
population that is either
working or looking for work.

37. Why Why
decrease increase in
in some some
countries? countries?

44. Seasonal Unemployment

46. Loss of jobs in coal-
mining and oil-drilling
units
Loss of jobs in entre
Loss of jobs in Tata
production units

47. •

48. in the labour market

49. Trade Unions
• Trade unions bargain for
higher wages.
• This may not match with
the improvement in
productivity.
• Rise in wages causes
unemployment.