Wednesday, May 18, 2011

What are the factor responsible for inflation?

What are the factor responsible for inflation? As a student of management how would you look at the problem of inflation? Collect data on inflation for the last five years and analyze the trends.

Ans: A persistent and appreciable rise in the prices is called inflation. During inflation all costs and prices do not rise together and in same proportion . But it is an increase in general level of prices measured by price index which is average of consumer or producer prices.
Inflation is the increase in prices caused by increases in money supply. An increase in the money supply is what constitutes inflation.
There are different measurements price inflation , depending on the basket of goods selected. The most common measures are of consumer inflation, producer inflation and GDP deflators , or price indexes. The last measures of inflation in the entire economy.
General price inflation is a fall in the purchasing power of money within economy, as compared to currency devaluation which is the fall of the market value of a currency between economies . It is referred to as a rise in the general level of prices. The formal applies to the value of the currency within the national region of use, whereas the latter applies to the external value on international markets.

Some terms related to inflation:
 Deflation is a rise in the purchasing power of money, and a corresponding lowering of prices
 Disinflation refers to slowing the rate of inflation, that is , prices are still rising , but at a slower rate than before.
 Reflation is a term used to denote inflation after a period of deflation, meaning inflation designed to restore prices to a previous level.
 Hyperinflation is a rapid inflation without any tendency towards equilibrium that is an inflation that produces even more inflation.

Examples of common measures of inflation include:
 The M0, M1, M2, M3, M4 measures of money supply
 The price of Gold and Silver.

There are different schools of thought as to what causes inflation. The too most prevalent theories are the neo-classical theory that inflation is driven by increases in the money supply, often used to finance govt. spending and the neo-Keynesian view that inflation is the result of diminishing returns of productivity.
• Demand pull inflation- inflation due to high demand for GDP an low unemployment , also known as Phillips Curve inflation.
• Cost push inflation- nowadays termed “ supply shock inflation”, due to an event such as a sudden increase in the price of oil.
• Built-in-inflation- introduced by adaptive expectations, often linked to the “price/ wage spiral” because it involves workers trying to keep their wages up with prices and then employers passing higher costs on to consumers as higher prices as part of a “vicious circle”.
• If GDP exceeds its potential , the theory says that, all else equal, inflation will accelerate as suppliers increase their prices and built –in-inflation worsens.
• If GDP falls below its potential level all else equal inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built-in-inflation: there is disinflation.

Stopping inflation:
There are a number of methods which have suggested to stop inflation.

Price controls:
Another method attempted is simply instituting wage and price controls. They are related to price supports, which set minimum prices to prevent deflation , or to maintain a particular good or service in production.

Inflation in India


Industrial workers
Base: 1982=100

1986-1987 141 137
1987-1988 154 149
1988-1989 168 163
1989-1990 177 173
1990-1991 199 193
1991-1992 230 219
1992-1993 254 240
1993-1994 272 258
1994-1995 304 284
1995-1996 337 313
1996-1997 369 342
1997-1998 388 366
1998-1999 445 414
1999-2000 446 428
2000-2001 453 444
2002-2003 467 463
2003-2004 477 482
2004-2005 495 500
2005-2006 506 520

Index Number of Whole sale price
Base : 1993-1994=100
1994-1995 116.9
1995-1996 122.2
1996-1997 128.8
1997-1998 134.6
1998-1999 141.7
1999-2000 150.9
2000-2001 159.2
2001-2002 161.8
2002-2003 172.3
2003-2004 180.3
2004-2005 189.5

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