INFLATION

Inflation, Measures, Types and Calculation

Disclaimer : This information has been presented for educational purposes only and
collected from various referred and online materials
 INTRODUCTION

i. What is inflation?
ii. Causes of inflation?
iii. What are the measures of
inflation?
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iv. How to control inflation?

v. Why inflation measures
are essential for the
business managers?
 INTRODUCTION
• Inflation is defined as a sustained
increase in the price level or a fall in
the value of money and the increase in
the general level of prices for goods and
services.
• When the level of currency of a country
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exceeds the level of production, inflation

occurs.
• According to Coulborn inflation can be
defined as,
• “too much money chasing too few
goods.”
 INTRODUCTION

According to Samuleson -Nordhaus, “Inflation

is a rise in the general level of prices.”

When inflation occurs, each dollar of income

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will buy fewer goods than before.

Friedman” Inflation is always and everywhere

a monetary phenomenon… and can be
produced only by a more rapid increase in the
quantity of money than output.”
The Government Prints TOO MUCH
Money
• Governments that keep printing money to
pay debts end up with hyperinflation.
• There are more “rich” people but the same
amount of products.

Examples:
• Bolivia, Peru, Brazil
• Germany after WWI
 Types of Inflation
• On the basis of rate of inflation-Creeping, walking, running and
hyperinflation
• On the basis of cause-Demand-pull and cost-push inflation
• On the basis of degree of control-Over inflation and suppressed
inflation
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• On the basis of coverage-Headline and core inflation

• On the basis of predictability of inflation-Anticipated and
unanticipated inflation
• On the basis of inducement-Wage induced inflation, Profit induced
inflation, Scarcity induced inflation, Deficit induced inflation,
Currency induced inflation
 Effects of inflation
• On production
• On distribution
Control of inflation
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• Monetary measures
• Fiscal measures
• Other measures
 INTRODUCTION

The goal(s) of monetary policy

• The amended RBI Act also provides for the inflation target to
be set by the Government of India, in consultation with the
Reserve Bank, once in every five years.
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• Accordingly, the Central Government has notified in the

Official Gazette 4 per cent Consumer Price Index (CPI)
inflation as the target for the period from August 5, 2016 to
March 31, 2021 with the upper tolerance limit of 6 per cent
and the lower tolerance limit of 2 per cent.
 INTRODUCTION
PRICE MOVEMENTS: INFLATION, DISINFLATION, DEFLATION
AND REFLATION
• Persistence and substantial fall in the overall price level below the full employment level of
output is referred to as deflation.
• Money value is rising, price level is falling, along with fall in output, employment and income.
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• In the two extreme situations of inflation and deflation, countries also experience
disinflation and reflation.

• Disinflation is a situation where an economy operates at above the full employment level of
output, price level keep on increasing, but the rate of increase in price level keep on
declining.

• On the other hand, reflation or partial inflation refers to a situation when an increase in
demand at below full employment level raises not only the price level, but also the volume
of output in the system
 INTRODUCTION

PRICE MOVEMENTS: INFLATION, DISINFLATION,

DEFLATION AND REFLATION
• Prices move along with the fluctuations in business activities.
• These movements are termed as inflation, disinflation, deflation and
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reflation.
• Inflation is a persistent and substantial rise in the general level of prices
after full employment level of output.
• The prices of different commodities may vary at different rates and in
different directions.
 INTRODUCTION
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 INTRODUCTION
• When consumers expect prices to rise, they spend now, boosting
economic growth.
• An important aspect of keeping a good inflation rate is managing
expectations of future inflation.
• Inflation is good when it is mild. There are two situations where this
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occurs. The first is when inflation makes consumers expect prices to

continue rising.
 INTRODUCTION
• When prices are going up, people want to buy now rather than pay more
later.
• This increases demand in the short term. As a result, stores sell more
and factories produce more now.
• They are more likely to hire new workers to meet demand. It creates a
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virtuous cycle, boosting economic growth.

• The second is when it removes the risk of deflation. That’s when
prices fall.
• When that happens, people wait to see if prices will drop more before
buying.
 INTRODUCTION
• It cuts back demand, and businesses reduce their inventory. As
a result, factories produce less and lay off workers.
Unemployment rises, leading to wage deflation.
• Workers have less money to spend, which reduces demand
even more.
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• Businesses lower their prices. That makes deflation worse. For

this reason, deflation is even more corrosive to economic
growth than inflation.
 INTRODUCTION
On the basis of RATE

Creeping Inflation:
• When the rise in prices is very slow like that of a snail or creeper, it is called
creeping inflation.
• In terms of speed, a sustained rise in prices of annual increase of less than 3
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per cent per annum is characterized as creeping inflation.

• Such an increase in prices is regarded safe and essential for economic growth.

Walking or Trotting Inflation:

• When prices rise moderately and the annual inflation rate is a single digit.
• In other words, the rate of rise in prices is in the intermediate range of 3 to 6
per cent per annum or less than 10 per cent.
 INTRODUCTION

Running Inflation:
• When prices rise rapidly like the running of a horse at a rate or speed
of 10 to 20 percent per annum, it is called running inflation.
• Such inflation affects the poor and middle classes adversely.
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• Its control requires strong monetary and fiscal measures, otherwise it

leads to hyperinflation.

Hyperinflation:
• When prices rise very fast at double or triple digit rates from more
than 20 to 100 percent per annum or more, it is usually called
runaway or galloping inflation.
 INTRODUCTION
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 INTRODUCTION
On the Basis of COVERAGE

Headline Inflation:
• Headline inflation is the total inflation in an economy.
• The headline inflation figure includes inflation in a
basket of goods that includes commodities like food
and energy.
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Core Inflation:
• Core inflation is the change in the costs of goods and
services but does not include those from the food and
energy sectors.
• Food and energy prices are exempt from this
calculation because their prices can be too volatile or
fluctuate in short term.
• Core inflation is important because it's used to
determine the impact of rising prices on consumer
income.
 INTRODUCTION
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 INTRODUCTION

• On the basis of degree of CONTROL

• Suppressed Inflation:
• The government imposes physical and monetary controls to check open inflation, it is
known as repressed or suppressed inflation.
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• The market mechanism is not allowed to function normally by the use of licensing, price
controls and rationing in order to suppress extensive rise in prices.

• Open Inflation:
• Inflation is open when “markets for goods or factors of production are allowed to function
freely, setting prices of goods and factors without normal interference by the authorities.
• Thus open inflation is the result of the uninterrupted operation of the market mechanism.
 Stagflation
• Stagflation is a new term which has been added to economic literature
in the 1970s.
• Stagflation is a situation when recession is accompanied by a high rate
of inflation.
• The principal cause of this phenomenon has been excessive demand in
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commodity markets, thereby causing prices to rise, and at the same

time the demand for labour is deficient, thereby creating
unemployment in the economy.
 Measurement of inflation
• Estimation of inflation is essential to estimate the overall price level.
Index or indicator
Price Index
• An index is a statistical device or measure that expresses average
change in the value of something in the current period in relation to its
value at a set previous time, known as the base period.
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• The value of an index at the base period is always set at 100.

• Index numbers are statistical devices designed to measure the relative
change in the level of phenomena with respect to time, location or other
characteristics.
• It is a statistical device that enables us to arrive at a single representative
figure which gives the general level of the prices of the phenomenon in
an extensive group.
 Index Number
• The formula for a simple aggregative price index is,

• Where P1 and P0 indicate the price of the commodity in the current period and base period
respectively. The simple aggregative price index from this given table is
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 Index Number
• Do you know that such an index is of limited use? The reason is that the units of measurement of prices of various
commodities are not the same. It is unweighted, because the relative importance of the items has not been properly reflected.
• The formula for a weighted aggregative price index is

• An index number becomes a weighted index when the relative importance of items is taken care of. This method uses the base
period quantities as weights. A weighted aggregative price index using base period quantities as weights, is also known as
Laspeyre’s price index. It provides an explanation to the question that if the expenditure on base period basket of
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commodities was Rs 100, how much should be the expenditure in the current period on the same basket of
commodities?
• Here weights are quantity weights. To construct a weighted aggregative index, a well-specified basket of commodities is taken
and its worth each year is calculated.

Using base period quantities as weights, the price is said to

have risen by 35.3 percent.
 Index Number
• Since the current period quantities differ from the base period quantities, the index number using current period
weights gives a different value of the index number.
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• It uses the current period quantities as weights. A weighted aggregative price index using current period
quantities as weights is known as Paasche’s price index.
• It helps in answering the question that, if the current period basket of commodities was consumed in the
base period and if we were spending Rs 100 on it, how much should be the expenditure in current period
on the same basket of commodities.
• Paasche’s price index of 132.1 is interpreted as a price rise of 32.1 per cent. Using current period weights, the
price is said to have risen by 32.1 per cent.
 INTRODUCTION
• Laspeyre price index is based on the assumption that the quantities consumed in the
base year and current year are same, which may not always be true, it may changes
due to changes in habits.
• Due to this, it is expected to have an upward bias.
• While the Paasche’s index is expected to have a downward bias,
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 INTRODUCTION
• WPI-It captures the average movement of wholesale prices of goods.
Wholesale price indexes (WPIs) are reported monthly in order to show
the average price changes of goods. The monthly WPI number shows
the average price changes of goods usually expressed in ratios or
percentages. Measure inflation at the producer level.
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• CPI-A Consumer Price Index (CPI) is designed to measure the changes

over time in general level of retail prices of selected goods and services
that households purchase for the purpose of consumption. The CPI
measures price changes by comparing, through time, the cost of a fixed
basket of commodities. Measure inflation at the consumer level.
 INTRODUCTION
CPI Vs WPI
• WPI reflects the change in average prices for bulk sale of commodities at
the first stage of transaction while CPI reflects the average change in prices
at retail level paid by the consumer.
• The prices used for compilation of WPI are collected at ex-factory level for
manufactured products, at ex-mine level for mineral products and mandi
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level for agricultural products.

• In contrast, retail prices applicable to consumers and collected from various
markets are used to compile CPI.
• The reasons for the divergence between the two indices can also be partly
attributed to the difference in the weight of food group in the two baskets.
 • India has a rich history of compilation of price indices.
• The records of compilation of WPI, the oldest among the price indices
in India, are available for as far back as the early 20th century (1915).
• Publication of these indices started from the period of the Second World
War with introduction of a ‘quick’ series using the week ended August
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19, 1939 as the base and computation of the Index from January 10,
1942.
• With regular publication of WPI since 1947, the index continued as a
weekly series till January 2012 and is thereafter being released as a
monthly series.
• WPI underwent several base revisions, usually decadal, and the present
base (2004-05) series is available since April 2004.
 INTRODUCTION
• The history of CPI in India is also very old.
• The consumer price index for industrial workers (CPI-IW) is being compiled
since October 1946.
• Though the coverage of CPI-IW was limited to industrial workers in three
sectors under the 1960 series, the coverage was extended to seven sectors
with effect from 1982.
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• The Government also compiled another series of consumer price indices for
agricultural labourers (CPI-AL) since September 1964.
• The series was split into separate indices for agricultural labourers and rural
labourers (CPI-RL) from November 1995.
• The present base (1986-87 = 100) uses consumer expenditure data collected
in the 38th Round of National Sample Survey8 (NSS), 1983, for deriving
weighting diagrams – separately for agricultural labourers and rural labourers.
 INTRODUCTION
• There exist differences between CPI-combined and WPI in terms of
aggregation of the two indices from item level to consolidated level
also.
• WPI is constructed using a national-level weighting diagram while
CPI-combined weights are based on consumer expenditure surveys.
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• Thus, when WPI inflation is aggregated, it is aggregated from items to

item groups to headline.
• Contrastingly, the construct of CPI-combined is such that it aggregates
items to item groups at the state level and then to headline state-level
indices.
 INTRODUCTION

• CPIs have been widely used as a macroeconomic indicator of inflation,

and also as a tool by Government and Central Bank for targeting
inflation and monitoring price stability.
• Why do we need to use the index numbers? Wholesale price index
number (WPI), consumer price index number (CPI) and industrial
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production index (IIP) are widely used in policy making.

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 INTRODUCTION
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 INTRODUCTION
2. Wholesale Price Index:
• A wholesale price index (WPI) is an index that measures and tracks the
changes in the price of goods in the stages before the retail level.
• This refers to goods that are sold in bulk and traded between entities or
businesses (instead of between consumers).
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 INTRODUCTION
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 INTRODUCTION
• The CPI basket consists of services like housing, education, medical care,
recreation etc. which are not part of WPI basket.
• A significant proportion of WPI item basket represents manufacturing
inputs and intermediate goods like minerals, basic metals, machinery etc.
whose prices are influenced by global factors but these are not directly
consumed by the households and are not part of the CPI item basket.
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• Similarly, the movement in prices of non-tradable items included in the CPI

basket widens the gap between WPI and CPI movements.
• The relative price trends of tradable vis a vis non-tradable is an important
explanatory factor for divergence in the two indices in the short term.
 INTRODUCTION
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 INTRODUCTION

• On the basis of CAUSE

• Demand Pull
• This occurs when AD increases at a faster rate than AS. Demand-pull inflation will
typically occur when the economy is growing
• faster than the long-run trend rate of growth.
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• If demand exceeds supply, firms will

respond by pushing up prices.
• e.g. The UK experienced demand-pull
inflation during the Lawson boom of the
late 1980s.
 INTRODUCTION
• A to B-Shift in the demand creates excess of demand over available supply-
Inflationary Gap.
• B to C-Excess of supply over the demand results in lowering in price-Deflationary
Gap
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 INTRODUCTION

Causes of demand-pull inflation:

1. Lower interest rates- A cut in interest rates causes a rise in consumer
spending and higher investment. This boost to demand causes a rise in
AD and inflationary pressures.
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2. Rising real wages- For example, unions bargaining for higher wage rates.
3. Exchange rate- A devaluation in the exchange rate of the local currency
affects the economy as it leads to expensive imports and reduced prices of
exports. Hence, consumers will be more inclined to buy local products
and would avoid imported products, thereby benefitting local industries.
The improved demand will increase the prices of locally made products
leading to a new equilibrium.
 INTRODUCTION

Causes of demand-pull inflation:

4-Expectation of inflation in the near future- When people expect inflation in
the near future and hence buy things now to avoid buying at higher prices
later. Howsoever funny it may sound, this anticipation of inflation creates a
Demand-Pull and, in turn, leads to inflated prices.
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5-Government spending- Government spending can also lead to Demand-

pull inflation. Let’s say the government plans to start some infrastructure
projects like the expansion of metro lines or building new highways. Such a
scenario attracts investments not only from the local businessmen but also
from international investors.
 INTRODUCTION

Cost Push Inflation

• Cost push inflation is inflation caused by an increase in prices of inputs like labor, raw
material, etc. The increased price of the factors of production leads to a decreased supply of
these goods.
• While the demand remains constant, the
prices of commodities increase causing a rise
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in the overall price level.

• Cost of production may rise due to an
increase in the prices of raw
materials, wages, etc.
• Example- A great example is oil, gasoline and the
Organization of Petroleum Exporting Countries (OPEC).
OPEC controls the majority of the world’s oil reserves,
and in 1973, it restricted production, causing prices to
skyrocket 400%.
 INTRODUCTION
Causes of Cost-Push Inflation
1. Monopoly-
• Companies that achieve a monopoly in an industry can create cost-push
inflation. A monopoly reduces supply to meet its profit goal.
• A good example is the Organization of Petroleum Exporting Countries
(OPEC). It sought monopoly power over oil prices. When OPEC restricted
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oil in 1973, it quadrupled prices. In 2014, shale oil producers challenged

OPEC's monopoly power. Prices dropped as a result. They created a U.S.
shale oil boom and bust.
2. Wage Inflation
• Wage inflation occurs when workers have enough leverage to force
through wage increases. Companies then pass higher costs through to
consumers. The U.S. auto industry experienced it when labor unions were
able to push for higher wages.
 INTRODUCTION
Causes of Cost-Push Inflation
3. Natural Disasters
• Natural disasters cause inflation by disrupting supply. A good example is
right after Japan's earthquake in 2011. It disrupted the supply of auto parts.
It also occurred after Hurricane Katrina. When the storm destroyed oil
refineries, gas prices soared.
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 INTRODUCTION
Relationship between demand pull and cost push inflation
They are interconnected and move quite often in tandem.

Demand pull inflation may increase the demand for factors of production,
leading to an increase in the prices of factors of production. An increase
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in the prices of factors of production causes cost push inflation.

The cost push inflation as a consequences of higher compensation to

employees, may result in higher demand for goods and services, which
may turn into the demand pull inflation.
 On the basis of Predictability
• Anticipated and unanticipated inflation

• Expected or inertial inflation by looking at the leading economic

factors.
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• Errors in the inflation forecast.

 Inflation
• The trajectory of consumer price index
(CPI) inflation since February 2022 has
been altered by spillovers from the
conflict in Ukraine.
• CPI inflation peaked in April 2022 and
has since then moderated but persists
above the pre-war levels and also above
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the upper tolerance band.

• Inflationary pressures have escalated
globally due to the successive black swan
events (unpredictable event)– the
COVID-19 pandemic and the conflict in
Ukraine.
• Monetary policy remains focused on
ensuring that inflation remains within the
target going forward while supporting
growth.
How are inflation and unemployment related in the short run?
In the long run?
• What factors alter this relationship?
• What is the short-run cost of reducing inflation?
• How are inflation and unemployment related in the short run? In the long
run?

• Phillips curve analysis- “Probably the single most important macroeconomic

relationship is the Phillips curve.”
• The Phillips curve is the short-run relationship between inflation and
unemployment.
• In 1958, economist A. W. Phillips published an article in the British journal
Economica that would make him famous.
• The article was titled “The Relationship between Unemployment and the Rate of
Change of Money Wages in the United Kingdom, 1861–1957.”
• In it, Phillips showed a negative correlation between the rate of unemployment
and the rate of inflation.
• Phillips curve analysis- There exists an inverse relationship between the rate of
change of money wage and the unemployment rate.
• Price level changes were first linked to money wage rate changes.
• In other words, when unemployment is low wage rate will rise and when
unemployment will high wage rate will fall.
• The inverse relationship between change the rate of change of money wage
and the rate of unemployment is known as the Phillips curve.
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Is Inflation
Good or
Bad?
 Effects of Inflation
1. Effects on Redistribution of Income and Wealth:
All prices do not change at the same rate. Therefore, inflation is asymmetric in its
impact. It affects different sections of a society differently.

• Debtors and Creditors

• Producers and Consumers
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• Salaried Persons
• Wage Earners
• Business community
• Holders of fixed interest security vs shareholders
• Fixed income earning class vs profiteers
• Farmers
• Government and the general public
 INTRODUCTION

2. Effect on Production and Economic Activities:

➢Mild inflation is not only desirable but also a necessary condition for economic
growth.
➢The widened profit margins due to a mild rise in prices induce firms to invest more
leading to higher employment and resource utilization.
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➢Inflation alters the relative prices and thus the profitability of different business
organisations is affected differently.
➢According to Keynes moderate or creeping inflation have favourable effect on
production, particularly when there unemployed resources in the country.
➢Rising prices increase the profit expectations of the entrepreneurs, they are induced
to step up investment as a result employment, and output will increase.
 INTRODUCTION

2. Effect on Production and Economic Activities:

Inflation has a mixed effect on both production and economic activity.
• When prices start rising production is encouraged as there is windfall profits
in the future which tends to increase employment, production and income.
• But this is only possible up to the full employment level. Further increases in
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investment beyond this level will lead to severe inflationary pressures.

• But it too has adverse impacts as it can lead to misallocation of resources,
black marketing, and hoarding, quality issues, speculation, etc.
• Inflation can be both beneficial to economic recovery and, in some cases,
negative.
• If inflation becomes too high, the economy can suffer; conversely, if inflation
is controlled and at reasonable levels, the economy may prosper.
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 Control Of Inflation

Different policy measures are used to control inflation depending upon its
source, cause and intensity.
The measures aimed at controlling inflation tries to bridge the gap
between aggregate demand for and the aggregate supply of different
goods and services.
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One of the prime objectives of monetary and fiscal policies in India is to

maintain price stability in the country.
Coordinated efforts are often made by the monetary and fiscal authorities
to achieve these objectives.
 Control Of Inflation

Fiscal Measures
Expansionary or contractionary fiscal policies are applied to combat inflation
[Link] expenditure- It is one of the important component of aggregate demand.
Restrictive fiscal policy such as, reduction in subsidies, wages and other admin expenses and
postponement of new projects etc. reduces the money income of the public.
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While exercising this instrument, the government must keep the non-essential expenditure to the
minimum rather than the development expenditure otherwise not only the demand side but also the
productivity capacity is affected adversely.
[Link]- reduces the purchasing power of the people
[Link] Borrowing and Debt- Borrowing by the government results in a transfer of
funds from the private sector to the public sector.
 INTRODUCTION
MONETARY MEASURES

Two types of techniques, i.e., quantitative and qualitative credit controls have
been used by the central banks world-wide to achieve their objective of
managing flow of credit in the economy.
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Quantitative control to regulates the volume of total credit.

Qualitative Control to regulates the flow of credit

Quantitative or traditional methods of credit control include banks rate policy,

open market operations and variable reserve ratio.
Qualitative or selective methods of credit control include regulation of margin
requirement, credit rationing, regulation of consumer credit and direct action.
 INTRODUCTION
Central banks use contractionary monetary policy to reduce inflation. They
reduce the money supply by restricting the volume of money banks can lend.
Quantitative Measures:
[Link] rate-
Borrowing from the central bank is one of the ways in which financial
institutions raise resources to fund their activities.
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Bank rates is the rate at which the central bank lends money to the commercial
banks, increase in bank rate pushes up the lending rates and makes investment
less attractive/discourages borrowings.
It is the rate at which the central bank lends money to the commercial banks.
An increase in the bank rate leads to an increase in the interest rate charged by
the commercial banks which in turn discourages borrowing by businessmen
and consumers.
 5. Monetary Policy Instruments cont.…
Difference between repo rate and bank rate:
• There is a subtle difference between repo rate and bank rate.
Monetary Policy and Economic Environment

• Financial institutions can borrow from the RBI at the bank rate without
submission of any collateral.
• On the other hand repo rate is charged for re-purchase of securities issued by the
RBI.
• Further, bank rate is higher than repo rate.
• In India, the bank rate is an administered rate, set by the monetary authority, &
is not market determined.
• The bank rate acts as a signaling device and changes in it are aimed at reflecting
changes in the medium-term stance of the policy.
 OMO
Central banks use contractionary monetary policy to reduce inflation.
They reduce the money supply by restricting the volume of money banks
can lend.
Quantitative Measures:
[Link] Market operations(OMO)-This consists of sale and purchase of
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Govt. securities by the central bank from the open market (consisting of
financial institutions and other dealers in govt. securities) rather than
directly to and from the Govt.
To control inflation sales securities, to pay for these securities , the public
surrenders, the sale of govt securities by the central bank reduces the
money supply in circulations and hence demand for goods and services.
It directly affect the money supply. Adjust rupee liquidity condition.
 INTRODUCTION
Central banks use contractionary monetary policy to reduce inflation.
They reduce the money supply by restricting the volume of money banks
can lend.
Quantitative Measures:
[Link] reserve requirements-CRR and SLR –
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CRR refers to the cash which banks have to maintain with the RBI as a
certain percentage of their demand and time liabilities.
It reduces availability of funds with the banks for the purpose of further
lending.
A reduction in credit is expected to reduce investment and consumption
expenditure and thereby, the aggregate demand and inflation.
CRR regulates the flow of money in the economy whereas SLR ensures the
solvency of the banks.
 INTRODUCTION

Selective Control Measures:

Direct control measures can even be adopted by the central bank
by regulating consumer credit, imposing higher margin
requirements, and issuing directives appealing to banks to
restrict and direct resources only toward the desired channels.
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 [Link] consumer credit
This method is an extremely useful supplementary tool for controlling inflation and
maintaining economic stability.
The regulation of consumer credit consists in laying down rules regarding payments
and maximum maturities of installment credit for the purchase of specified durable
consumer goods.
Thus, this form of selective control employs two devices: minimum down payment,
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and maximum period of payment.

Raising the required down payment limit tends to reduce the demand for credit for this
purpose, as well as to reduce the amount that can be legally supplied for it.
Shortening of maximum period of payment, with increased required installment
payments, also tends to reduce the demand for such loans and thereby check consumer
credit.
During inflationary period consumer credit facilities are restrained by rising the down
payments and reducing payment period of credit on selective basis.
 Selective Control Measures

[Link] Margin requirements-Borrowers are subject to higher margin

requirements when they approach financial institutions for credit.
‘Margin’ refers to the difference between market value of securities and the
amount borrowed against these securities.
In recent years, it had been tried in India also to restrict speculation or hoarding in
essential commodities.
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The essence of this method is that a bank while advancing credit against a security
does not lend the full amount (full value of security) but less.
During inflationary boom businessmen and speculators try to get credit by
pledging gold or securities to the bank.
A bank does not advance loan equal to the value of the security but less, e.g., a
commercial bank lends Rs. 800 against a security worth Rs. 1,000 the margin is
Rs. 200 or 20 per cent.
 Selective Control Measures

[Link], Moral suasion, publicity and direct action-The central

bank may often issue directives to financial institutions to curtail the
expansion of credit. Failure of which at times results in direct
interventions by the central bank in the working of these institutions.
Moral Suasion- It refers to the advice given by the central bank to
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commercial banks in respect of their lending and other operations with

the expectation that it will be accepted, and the letter will operate
accordingly.
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 Implication for business managers

➢Business managers constantly need to monitor the inflationary

build-ups in an economy while taking their production,
investment and various strategic decisions.

➢To the extent business firms are able to find a pattern in the
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inflationary dynamism on the basis of past trend, able to

understand the factors affecting the inflation, able to project
and anticipate the inflation rate in the coming period, they
would be able to incorporate inflationary factors in their
business decisions and protect their interest by taking
defensive and protective measures.
 Implication for business managers
➢Modest inflation, i.e., creeping to walking inflation, is identified to be
conducive for production and business enterprises.
➢In an inflationary scenario, the profitability of business ventures
increases, which induces managers and producers to enhance their
production level and expand their production capacity.
INFLATION

➢Similarly, rapid increase in inflation rate also increases the profitability

of business organizations.
➢But it also creates uncertainty regarding the price level in the coming
period.
 Implication for business managers
➢In general, it generates the expectation that the inflation rate is going to
rise further in the coming period and the commodity sold in the next
period would fetch them a better price.
➢The uncertainty regarding the future inflation rate puts on hold the
investment decisions of firms; rather producers prefer holding back the
INFLATION

supply of already produced goods in expectation of better prices for the

same in the coming period.
➢The rapidly rising prices benefit business units only for a certain period.
➢In the long run they are also affected adversely by the soaring level of
prices both on the demand and supply front.
 Thank You…

Disclaimer : This information has been presented for educational purposes only and
collected from various referred and online materials. Please use this material for
your study purpose only.