Inflation

INFLATION IN INDIA

DEFINITIONS:

"An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand.

This definition includes some of the basic economics of inflation and would seem to indicate that inflation is not defined as the increase in prices but as the increase in the supply of money that causes the increase in prices i.e. inflation is a cause rather than an effect.

A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

In this definition, inflation would appear to be the consequence or result (rising prices) rather than the cause.

A general and progressive increase in prices; "in inflation everything gets more valuable except money"

CAUSES FOR INFLATION:

Inflation is caused by a combination of four factors.

Those factors are:

The supply of money goes up.

The supply of goods goes down.

Demand for money goes down.

Demand for goods goes up

IMPACT OF INFLATION:

Inflation seemed to be a chronic problem in many parts of the world. There is a wide spread recognition that inflation results in inefficient resource allocation and hence reduces potential economic growth. Inflation imposes high cost on economies and societies; disproportionately hurts the poor and fixed income groups and creates uncertainty throughout the economy and undermines macro economic stability. High inflation has always penalized the poor more than the rich because the poor are less able to protect themselves against the consequences, and less able to hedge against the risks that high inflation poses. Lowering inflation therefore, directly benefits the low and fixed

income groups.Economists think of inflation more plainly as a "sustained rise in the general level of prices." Their concerns focus on questions such as whether inflation distorts economic decisions. Very high inflation adversely impacts economic performance, as evidence from cross-country studies shows. Likewise, moderate levels of inflation can distort investment and consumption decisions.

1. ON OUR FUTURE PLANS:

Inflation has an impact on our plans for the future. When saving for retirement, college, a house, or simply budgeting for the next 12 months, the cost of goods and services have a direct impact on your goals. Due to inflation, your goals may cost more in the future than today. A meal that costs $10 today may cost $10.36 in one year. A car that costs $10,000 today may cost $10,359 in one year, and almost $12,000 in only 5 years. So, when planning for the future, you must consider inflation and the effect it may have on your goals.

2. REAL WAGES OF EMPLOYEES:

Many people dislike inflation because they feel it makes it easier for the government, employers, financial institutions, and others to deceive them. One of the most important things about inflation is that the confusion caused by price changes enables people to play tricks on employees, at their expense." Thus, some employers may "forget" to raise their employees' wages as much as inflation thereby giving them a real pay cut. There is evidence that people do get fooled, at least initially, about their real wages.people seem to base their sense of satisfaction on nominal earnings, rather than real earnings.

3. PAYING HIGHER TAXES:

Inflation creates other opportunities for sophisticated institutions to unfairly take advantage of the average individual, in many people's minds. Inflation can increase the complexity of evaluating financial assets, from CDs and insurance policies to stocks and bonds. This shifts the distribution of power in the financial marketplace to the more sophisticated and knowledgeable actors to the detriment of the average person, in this view. Thus, the government might "forget" to change the tax brackets after an inflationary episode, so the average person would end up paying higher taxes.

4. DISTORTING INVESTMENTS:

Economists tend to emphasize that inflation can do economic damage by distorting investment and consumption decisions. Distortions results from households' and businesses' uncertainty about inflation's future course.When inflation is stable, people are more likely to have roughly the same anticipation of its future level. When inflation is highly volatile, however, people have different guesses. Most turn out to be wrong. Inadvertently, some end up winners and others losers.

CURRENT INFLATION IN INDIA

India's inflation, based on the Wholesale Price Index (WPI), stood at 4.61% in the week ended September 9, the Government said on Friday. It was at 4.78% in the previous week.

Meanwhile, the Commerce & Industry Ministry has revised inflation for the week ended July 15, from the preliminary estimate of 4.52% to 4.62%.

India's wholesale price index rose 4.61 percent in the 12 months to Sept. 9, lower than 4.78 percent a week earlier due to lower price of manufactured products.

India's accelerating industrial production growth should help control inflation by boosting the supply of manufactured products.

Industrial production, which accounts for almost a quarter of India's $775 billion economy, expanded at the fastest pace in a decade in July, as power companies doubled electricity output to keep up with demand from factories producing cars and textiles and government spending on roads and ports spurred demand for steel and cement.

The pace of growth raised concern among economists that rapid consumer demand may spur inflation and prompt India's central bank to increase interest rates next month for the fourth time this year. The wholesale price index of manufactured products rose to a two-month high of 3.79 percent in the first week of September.

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