INTRODUCTION:
What is Inflation? In economics, inflation is a sustained
increase in the general price level of goods and services in an
economy over a period of time.
Consequently, inflation reflects a reduction in the purchasing power
per unit of money - a loss of real value in the medium of exchange
and unit of account within the economy.
Study of price changes: Studying price changes is crucial for
businesses and investors as it allows them to understand market
dynamics, make informed decisions about pricing strategies,
respond to changing market conditions, maximize profitability, and
gauge the value of investments by predicting future price
movements, ultimately helping them to optimize their revenue and
market positioning.
Types of Inflation:
Moderate inflation: When inflation is relatively low and steady, typically around 3%
to 5% per year. Walking inflation: When the yearly rate of price growth is between
3 and 4%.
Galloping inflation: When prices increase rapidly and uncontrollably, often in
double digits.
Hyperinflation: When inflation reaches extremely high levels.
Demand-pull inflation: When demand for goods and services is higher than supply,
prices increase.
Cost-push inflation: When the cost of wages and raw materials increases, prices
increase.
Causes of Inflation :-
➢ Increased consumer demand
➢ Higher production costs (labor, raw materials)
➢ Government policies (taxation, subsidies)
➢ Supply chain disruptions
➢ Monetary factors (money supply growth)
Effect Of Inflation:
Decreased purchasing power: Inflation reduces the value of money, which means
that consumers can buy fewer things with the same amount of money.
Increased uncertainty: Inflation can make financial markets more volatile, which
can lead to fluctuations in asset prices.
Disrupted economic growth: Inflation can disrupt economic growth by increasing
uncertainty and volatility in financial markets.
Disproportionate impact on low-income individuals: Low-income individuals may
be more vulnerable to rising prices because they may have less ability to adjust
their spending.
Measuring Inflation:
Inflation rate, the annualized percentage change in a general price
index, usually the consumer price index, over time.
If the price level in the current year is 'P1’ & in the previous year is
‘Po’, then inflation for the current year is-
(P1-Po)/Po*100
Historical Inflation Trends :-
❑ Inflation trends over the past decades
❑ Major inflationary periods (e.g., 1970s Oil Crisis, 2008 Financial
Crisis)
❑ Recent inflation trends post-pandemic
How to control Inflation rates:-
• Increase interest rates to make borrowing
expensive.
• Reduce money supply to control extra cash
in the economy.
• Lower government spending to reduce
demand.
• Increase taxes so people spend less.
• Produce more goods to match demand.
Inflation and Price Changes in Key
Sectors :-
•Food:- Fluctuations in agricultural commodity prices,
weather events, and supply chain disruptions can lead
to significant changes in food prices, impacting the cost
of staples like grains, vegetables, and meat.
•Energy:- Global oil prices and domestic energy policies
heavily influence fuel costs, impacting transportation,
heating, and electricity bills.
•Housing: -Rent and home prices are key components of
housing costs, affected by factors like interest rates,
construction costs, and demand dynamics.
•Transportation: -Fuel prices, vehicle costs, and public
transportation fares contribute to transportation
inflation, impacting commuting expenses.
Inflation and Global Economy :-
▪ Price increases :-Inflation has led to higher prices for goods and services,
which has hurt consumers and businesses.
▪ Supply chain issues :- Supply chain disruptions have contributed to
inflation, and have been made worse by geopolitical conflicts like the war
in Ukraine.
▪ Economic instability :-Inflation has contributed to economic instability,
which has made it harder for governments to manage debt and respond to
future shock.
Recent Inflation Trends (2024) :-
India’s Current Inflation Rate :- According to the data released by the Ministry of Statistics
and Programme Implementation, India's consumer price index inflation is 5.22 percent
(Year-on-Year) in December 2024. The corresponding inflation rates for rural and urban are
5.76 percent and 4.58 percent, respectively.
US Current Inflation Rate :-
• The IMF predicts that global inflation will decline from 6.8% in 2023 to 5.9% in 2024.
• The IMF also predicts that core inflation will decline more gradually.
• The IMF predicts that advanced economies will return to their inflation targets sooner
than emerging market and developing economies
Future Outlook on Inflation :-
According to current forecasts, global inflation is expected to gradually decline in the
coming years, with most projections showing a trend towards returning to pre-pandemic
levels, although risks remain due to geopolitical factors and potential supply chain
disruptions; advanced economies are likely to reach their inflation targets sooner than
emerging markets.
The International Monetary Fund (IMF) predicts a steady drop in global inflation, with rates
falling from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025.
THANK YOU
