Inflation is nothing but the more price we pay for goods. It is the persistent rise of all goods and services over a period of time. There are several factors that influences inflation in India. The major factors to be taken into account is the population, unbalanced economic growth, demand for more money and increased taxes. On the flip side it has adverse effects on consumers.
The day to day goods are sold considerably at a higher rate which makes difficult for the consumers to afford their basic needs. Hence the need for money increases which is one of the major cause.
There is huge money gap which could be the potential factor for increased price and inflation in India. Increase in enormous expenditure can cause inflammatory gap at current prices.
The rate of inflation is measured on the basis of price indices which are of two kinds—Wholesale
Price Index (WPI) and Consumer Price Index (CPI).
Types of Inflation
Demand – Pull Inflation
When there is a mis-match between demand and supply, it will eventually pull up the prices. Here we have two cases. In first case, the demand increases over the same level of supply. In second case, the supply decreases with the same level of demand. In both cases the situation of
demand-pull inflation arise.
Cost – Push Inflation
An increase in factor input costs pushes up prices. In general the factors that could contribute to Cost-Push inflation are increases in corporate taxes, rising wages, and rising raw materials cost.
Low inflation takes place in a longer period and the range of increase is usually in ‘single digit’. Such inflation has also been called as ‘creeping inflation’.
Deflation is the exact opposite of inflation. The persistent fall in the prices of all goods and services over a period of time is called deflation. When deflation occurs it is possible to buy more amount of goods with the same amount of money. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.
Stagflation is a situation in an economy where inflation and unemployment both are at higher levels. Stagflation occurs when the economy isn’t growing but prices are going up. Stagflation is basically a combination of high inflation and low growth.
This is a “very high inflation” running in the range of double-digit or triple digit (i.e. 20%, 100% or 200% a year). The Russian economy showed such inflation after the disintegration of the ex-USSR in the late 1980s.
This form of inflation is ‘large and accelerating’ which might have the annual rates in million or even trillion. In such inflation not only range of increase is very large but the increase takes place in a very short span of time, prices shoot up overnight. This hasn’t happened in the U.S. since the Civil War, occurred in Germany before World War II, and in Zimbabwe in the 2000s. Such an inflation quickly leads to a complete loss of confidence in the domestic currency and people start opting for other forms of money.
It is an un-usual inflation, where there is an inflation in one particular sector for a particular period of time, while the other sector is experiencing no changes at all or facing deflation.
Impacts of Inflation
- It slow down the economic growth rate.
- Inflation redistributes wealth from creditors to debtors i.e. lenders suffer and borrowers benefit out of inflation.
- Prices goes up, that mean you pay more money for the same product which you got it lesser earlier.
- With the rise in inflation, lending institutions feel the pressure of higher lending.
- Investment in the economy is boosted by the inflation (in the short-run).
The standard of living declines.
- The export segment of the economy benefits due to inflation.
- Inflation gives an economy the advantage of lower imports and import-substitution as foreign goods become costlier.