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Inflation, Deflation etc.

Inflation

Inflation is defined as a sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. Put differently, as inflation rises, every rupee you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation.

Different thinkers have given different reasons for inflation:

1. When there is very high level of money supply for purchase of small number of commodities.
2. When the demand for commodities is more than their supply.
3. Problems in supply structural imbalance etc.

In general it can be said that inflation means increase in prices in a given period which may result in more price rise in future.

Reasons for Inflation –

Demand side reasons

Increase in Government Expenditure – It is increasing for the last several years. It leads to more money in the hands of the people and results in increase in purchasing power. It is mostly non-plan expenditure which is non-productive and only results in increase in demand and purchasing power.

1. When deficit in the budget of Government it taken care of by issue of more currency resulting in increase in money supply.

Price rice reasons

1. Changes in demand and supply: When there is extreme change in demand and supply people start hoarding and this may result in increase in prices.
2. Increase in wages in excess of productivity results in the increase in cost of production and therefore increase in prices.
3. Increase in indirect taxes also leads to increase in prices.
4. Structural deficiencies can lead to increase in unit cost and also prices.
5. Increase in administered prices e.g. food grains, petroleum products etc.

Effects of Inflation

1. Uncertainty in production results in uncertainty in demand and this leads to inappropriate distribution of resources. Capital is then used with a short term vision and not long term vision. Investment in non-essential things increases because with increase in prices of non-essential things makes it profitable.
2. Inflation leads to recession in many areas of economy because of reduction in demand. People buy only essential commodities. This leads to slowing of economy and reduction in production of many goods.
3. Income distribution in the country becomes skewed. Salaried class faces problems. Profiteering, corruption and black marketing increases. The will power for labor reduces.

Inflation is measured in India by Wholesale Price Index and Consumer Price Index.

Disinflation – When money supply is deliberately decreased to reduce the harmful effects of inflation.

Deflation – When supply of money is less than its demand. Production of goods and services increases and prices fall. The internal value of money increases.

Effects of Deflation –

1. Fall in demand
2. Fall in trade and commerce.
3. Increase in unemployment
4. Advantage of lender and disadvantage to creditor.

Reflation – When prices fall and industries star closing down due to excessive defaltion then the policy of increasing inflation in a controlled manner is followed by increasing money supply and credit. This is called reflation.