This article discusses the inflation, the current situation, the causes and the means to control inflation in India. Inflation refers to the rise in the price of goods and fall in the value of money. Inflation refers to the problem of rising prices. The problem has been with us for a long time now. The trend of rising prices in India has, in time, aroused dismay, consternation and anger.
Hence, we are nowhere near the goal of an egalitarian society which we had set out to achieve. Problem of price rise in India. The current rate of inflation is alarming. The rapidly increasing prices in India has been a topic of discussion at all levels during these days.
As aggregate demand curve shifts to AD 2 , price level rises to OP 2. Thus, an increase in aggregate demand at the full employment stage leads to an increase in price level only, rather than the level of output. However, how much price level will rise following an increase in aggregate demand depends on the slope of the AS curve. DPI originates in the monetary sector. An increase in nominal money supply shifts aggregate demand curve rightward.
This enables people to hold excess cash balances. Spending of excess cash balances by them causes price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply.
Keynesians argue that inflation originates in the non-monetary sector or the real sector. Aggregate demand may rise if there is an increase in consumption expenditure following a tax cut. There may be an autonomous increase in business investment or government expenditure. Governmental expenditure is inflationary if the needed money is procured by the government by printing additional money.
In brief, an increase in aggregate demand i. However, aggregate demand may rise following an increase in money supply generated by the printing of additional money classical argument which drives prices upward.
Thus, money plays a vital role. That is why Milton Friedman believes that inflation is always and everywhere a monetary phenomenon. There are other reasons that may push aggregate demand and, hence, price level upwards.
For instance, growth of population stimulates aggregate demand. Higher export earnings increase the purchasing power of the exporting countries. Additional purchasing power means additional aggregate demand.
Purchasing power and, hence, aggregate demand, may also go up if government repays public debt. Again, there is a tendency on the part of the holders of black money to spend on conspicuous consumption goods. Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors. In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is usually associated with the non-monetary factors.
CPI arises due to the increase in cost of production. Cost of production may rise due to a rise in the cost of raw materials or increase in wages.
Such increases in costs are passed on to consumers by firms by raising the prices of the products. Rising wages lead to rising costs. Rising costs lead to rising prices.
And rising prices, again, prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts. This causes aggregate supply curve to shift leftward. This can be demonstrated graphically Fig. Below the full employment stage this AS curve is positive sloping and at full employment stage it becomes perfectly inelastic.
Now, there is a leftward shift of aggregate supply curve to AS 2. With no change in aggregate demand, this causes price level to rise to OP 2 and output to fall to OY 2. With the reduction in output, employment in the economy declines or unemployment rises. Thus, CPI may arise even below the full employment Y f stage. It is the cost factors that pull the prices upward.
One of the important causes of price rise is the rise in price of raw materials. For instance, by an administrative order the government may hike the price of petrol or diesel or freight rate. Firms buy these inputs now at a higher price. This leads to an upward pressure on cost of production.
Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by OPEC compels the government to increase the price of petrol and diesel. These two important raw materials are needed by every sector, especially the transport sector. As a result, transport costs go up resulting in higher general price level. Again, CPI may be induced by wage-push inflation or profit-push inflation.
Trade unions demand higher money wages as a compensation against inflationary price rise. If increase in money wages exceeds labour productivity, aggregate supply will shift upward and leftward. Firms often exercise power by pushing up prices independently of consumer demand to expand their profit margins. Fiscal policy changes, such as an increase in tax rates leads to an upward pressure in cost of production.
For instance, an overall increase in excise tax of mass consumption goods is definitely inflationary. That is why government is then accused of causing inflation. Finally, production setbacks may result in decreases in output.
Natural disaster, exhaustion of natural resources, work stoppages, electric power cuts, etc. In the midst of this output reduction, artificial scarcity of any goods by traders and hoarders just simply ignite the situation. Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors.
A particular factor cannot be held responsible for inflationary price rise. When they act as buyers they want prices of goods and services to remain stable but as sellers they expect the prices of goods and services should go up. The old people are in the habit of recalling the days when the price of say, meat per kilogram cost just 10 rupees. Today it is Rs. This is true for all other commodities. When they enjoyed a better living standard.
Imagine today, how worse we are! This goes unusually untold. When price level goes up, there is both a gainer and a loser. To evaluate the consequence of inflation, one must identify the nature of inflation which may be anticipated and unanticipated. If inflation is anticipated, people can adjust with the new situation and costs of inflation to the society will be smaller.
In reality, people cannot predict accurately future events or people often make mistakes in predicting the course of inflation. In other words, inflation may be unanticipated when people fail to adjust completely.
This creates various problems. During inflation, usually people experience rise in incomes. But some people gain during inflation at the expense of others. Some individuals gain because their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation.
Thus, it redistributes income and wealth. Though no conclusive evidence can be cited, it can be asserted that following categories of people are affected by inflation differently: Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms. When debts are repaid their real value declines by the price level increase and, hence, creditors lose. An individual may be interested in buying a house by taking a loan of Rs.
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