INFLATION
What is Inflation?
· Inflation refers to the rise in the prices of most goods and services of daily or common use, such
as food, clothing, housing, recreation, transport, consumer staples, etc.
· The opposite and rare fall in the price index of this basket of items is called ‘deflation’.
· Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency.
This could ultimately lead to a deceleration in economic growth.
However, a moderate level of inflation is required in the economy to ensure that production is
promoted.
Who measures Inflation in India?
· Inflation is measured by a central government authority, which is in charge of adopting measures
to ensure the smooth running of the economy. In India, the Ministry of Statistics and Programme
Implementation measures inflation.
· In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and
CPI (Consumer Price Index) which measure wholesale and retail-level price changes, respectively.
The CPI calculates the difference in the price of commodities and services such as food, medical
care, education, electronics etc, which Indian consumers buy for use.
What are the main causes of Inflation?
· High demand and low production or supply of multiple commodities create a demand-supply
gap, which leads to a hike in prices.
· Excess circulation of money leads to inflation as money loses its purchasing power.With people
having more money, they also tend to spend more, which causes increased demand.
· Spurt in production prices of certain commodities also causes inflation as the price of the final
product increases. This is called cost-push inflation.
· Increase in the prices of goods and services is also a factor to consider as the involved labour
also expects and demands more costs/wages to maintain their cost of living. This spirals to
further increase in the prices of goods.
Case of Inflation
· In the early and mid-1970s when OPEC (The Organisation of Petroleum Exporting Countries),
which works like a cartel, decided to cut supply and sent oil prices soaring across the world. For
instance, in 1974, the oil prices went up by almost 70% and it leads to a consequent rise in
inflation.
· On the one hand, the rise in oil prices constrained the productive capacity of most western
economies that heavily depended on oil, thus hampering economic growth. On the other hand,
the oil price spike also led to inflation and commodities became more costly.
Remedies
The different remedies to solve issues related to inflation can be stated as:
· Monetary Policy (Contractionary policy) The monetary policy of the Reserve Bank of India is
aimed at managing the quantity of money in order to meet the requirements of different sectors
of the economy and to boost economic growth. Monetary policy is either contractionary or
expansionary.
· When the total money supply is increased rapidly than normal, it is called an expansionary policy
while a slower increase or even a decrease of the same refers to a contractionary policy.
· This contractionary policy is manifested by decreasing bond prices and increasing interest rates.
This helps in reducing expenses during inflation which ultimately helps halt economic growth
and, in turn, the rate of inflation.
· Fiscal Policy
· The fiscal policy is often seen separate from Monetary policy , it deals with taxation, spending by
government and borrowing. It deals with the Revenue and Expenditure policy of the
government.
· Tools of fiscal policy
· Direct and Indirect taxes (Direct taxes should be increased and indirect taxes should be
reduced).
· Public Expenditure should be decreased (should borrow less from RBI and more from other
financial institutions)
Conclusion
· With food accounting for two-thirds of household budgets, higher prices will worsen demand for
non-food goods. At a time when consumption expenditure data shows rising poverty along with
declining wages, climbing inflation will only lead to increased vulnerability, while making an
economic recovery harder.
· There is a need for synchronization of the fiscal policy with monetary policy. This may help the
government to avert the condition of stagflation before it has a detrimental impact on Indian
Economy.
