Twitchy inflation
when the rate of inflation becomes
immeasurable and completely
uncontrollable
total crumple of fiscal system for the reason
that the incessant drop in purchasing power
Government reaction
Classified into:
Open inflation
Repressed inflation
Government reaction
Open inflation :
When the government does not attempt to
prevent a price rise, it is called open inflation
During open inflation, free market is allowed to
ration the short supply of goods and distribute
them according to consumer's ability to pay.
Government reaction
Repressed inflation :
Happens when the government controls a
price rise.
As opposed to open inflation, this prevent
distribution through price rise under free
market mechanism and substitutes instead
a distribution system based on controls
..
Nature of time period of
occurrence
Classified into:
War-time inflation
Post-war inflation
Peace-time inflation
Nature of time period of
occurrence
War-time inflation:
Due to increased unproductive spending on
defence.
As commodities are required for war
emergencies, supply of goods is reduced in
market which causes inflation.
Cost-pull inflation
Built-in inflation
Misc. classification
Demand-pull inflation:
caused by increases in aggregate demand due
to increased private and government
spending.
Cost-pull inflation:
caused by a drop in aggregate supply due to
natural disasters, or increased prices of inputs.
Also called supply shock inflation
Misc classification
Built-in inflation:
This concept can linked to a price/wage
spiral or a vicious circle.
It involves workers trying to keep their wages
up with prices , and firms passing these higher
labour costs on to their customers as higher
prices, leading to a 'vicious circle'.
Types of deflation
Cash Building
Deflation Growth Deflation
Bank Credit Deflation
Confiscatory Deflation
Types of deflation
Cash Building Deflation:
caused when people are saving more money,
which decreases the use of money but
increases the demand for money.
Cash building (hoarding) to save more cash by
a reduction in consumption causes deflation
Growth Deflation:
Occurs when there is a decrease in the
Consumer Price Index and an increase in the
supply of goods.
Due to competition, price of goods may
decrease, causing deflation
Types of deflation
Bank Credit Deflation:
when there is a decrease in the credit supply
of the bank, caused by bankruptcies.
Or when money supply decreases from a
nation's central bank.
Confiscatory Deflation:
This is due to freezing of bank deposits and
decrease of the money supply.
Freezing of banks/bank accounts happens due
to govt. action.
Effects of Inflation
hoarding
Unemployment
Effect of investment
Costs to debtors
MEASUREMENT METHODS
MEASUREMENT METHODS
A measurement of change in price level is
required to have a stable economy.
Most widely used statistic to measure inflation
is consumer rice index (CPI) also referred to
as the retail price index (RPI) .
CPI or RPI is the index that measures the
average price change of various commodities
in the market.
Accurate measure of average price index is
difficult.
CPI or RPI
The prices of various commodities change in
different rates at different times.
So a representative list of typical
goods/services consumed by average
household is compiled into a basket.
A weightage is given to each item based on
the quantity consumed.
The change in the price of the basket is
termed as the CPI.
Need for CPI
CPI affects the budget planning in various levels
such as :
Govt.
Panchayat
Business
Individual
For eg. When there is a deflation, sellers try to
reduce the inventory of goods.
Or when there is inflation, entities try to obtain
more quantity of the goods than they really want.
Numerical Example
Consider a 'market basket' of weekly
expenditures of an average teenager:
Snack
Coke
Petrol
PRICE INDEX
AMOUNT PRICE PRICE PRICE
YEAR 1 YEAR 2 YEAR 3
SNACK 3 75 70 90
COLAS 8 CANS 25 30 30
Numerical Example
YEAR 1 YEAR 1 YEAR 2 YEAR 2