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What is inflation???<br />Inflation is the state when the value of money is falling and there is an upward rise in price level.<br />Too much of money chasing, but very few goods.<br /> For example, if the inflation rate is 5% for a particular item, it means that the demand is 5% more than the total supply of that particular item.<br />
Types of inflation<br />Demand pull Inflation .<br />Cost push inflation.<br />Pricing power inflation.<br />Skew inflation .<br />
Demand pull inflation<br />When demand grows faster than supply it pushes general prices up. This can be described as “too much money chasing too few goods”.<br />India being a growing economy has experienced this type of Inflation for years. Almost all industries in India face demand pull inflation especially when it comes to the technology driven industry like Automobile, Consumer Electronics.<br />
Cost push inflation<br />Cost-push inflation is a type of inflation caused by substantial increases in the cost of Important goods or services where no suitable alternative is available.<br /> A situation that has been often cited of this was the oil crisis of the 1970s, which some economists see as a major cause of the inflation experienced in the Western world in that decade.<br />
Pricing power inflation<br />This type of inflation is caused by business houses who tend to increase prices to increase their profit margins. It is more common in oligopolistic economies.<br />skew inflation<br />This term has been coined observing the unusual inflation where in there was huge inflation in the food sector with the non-food sector remaining more or less constant.<br />
Factors affecting inflation<br />Increase in money supply.<br />Increase in exports.<br />Black money.(fake currency).<br />Increase in public expenditure<br />Decrease in the aggregate supply of goods and services.<br />
how is inflation measured??<br />A measure of price changes in consumer goods and services such as gasoline,food,clothing and automobiles. the CPI measures price change from the perspective of a consumer.<br />A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPI measures price change from the perspective of a seller <br />
Problems due to inflation<br />When the balance between supply and demand<br />Goes out of control, consumers could change their buying habits, forcing manufacturers to cut down production.<br />Price increase can worsen the poverty affecting the low income household<br />Producers will not be able to control the cost of raw material and labor and hence the price of the final product, which results in less profit or in some cases no profit, forcing them out of business<br />Manufactures will not have an incentive to invest in new equipment and technology<br />
How inflation is a threat to Indian economy<br />
<ul><li>Inflation has become a household name for millions of Indians who are finding it extremely difficult to make both ends meet. Prices are growing faster than the household income almost for all products and services including real estate, food, transportation, luxuries.
The global economic crisis saw many economies stumble but India rebounded faster and was surging ahead with a growth rate of 9%. But the inflationary pressure is forcing the government to adopt measures which are taking the steam out of the Indian growth story.</li></li></ul><li>For the last two years India is witnessing double digit food inflation which had reached a high of around 18% in December 2010 with prices of onions, garlic and tomatoes skyrocketing. Lentils, milk and meat have witnessed a steady rise in prices which is putting pressure on the home budget of millions of Indians.<br />
Millions of poor people in India are struggling to arrange a two-square meal for their family members. We are running the risk of having an entire generation of malnourished children who are otherwise considered the future of India.<br />The tightening of the economy may control inflation in the long run but it is also slowing our economy and as predicted by the IMF India’s growth will be only around 6-7% instead of 9%.<br />
Current status of inflation in India<br /><ul><li>Currently inflation rate is around 9.44% in India, much above the acceptable rate of 5%.
The food price index is at 8.31% causing much discomfort to the policymakers.</li></li></ul><li>Economists have strongly criticized the Indian government for not being able to restrict inflation. They also feel that RBI needs to take additional measures to tame down inflation.<br />The RBI has decided to review its monetary policies mid-quarterly to assess the economic scenario. Economists have welcomed this move as such proactive reaction is needed in times of economic volatility.<br />The Indian policymakers are walking on a tight rope and it is yet to see whether they can bring back inflation to the acceptable 5% mark which under the current scenario seems impossible.<br />
Inflation in Food and Non-food Commodities during 1994-95 to January 2010(Based on WPI with base 1993-94) and Growth Rate in Food Output (%)<br />