What is Inflation?

Abstract: Inflation is an economic concept. It refers to the rising prices of goods, commodities, and
services in a particular economy. With the rising prices of goods and services, the purchasing value of
money will decrease. So the purchasing power of the consumer will also see a decline.
For example, say the price of a loaf of bread 10 years ago was 5 Taka and today it is 20 Taka. So the 15
taka increase in the price of a loaf of bread is due to the inflation in the economy.

Introduction: Inflation is the decline of purchasing power of a given currency over time. It is the rate
at which the the value of a currency is falling and consequently the general level of prices for goods
and services is rising. In economics, Inflation means that the general level of prices of goods and
services is going up, and consequently, the purchasing power of currency is falling. When the general
price level rises, each unit of currency buys fewer goods and services. It is the opposite of deflation.
More money will need to be paid for goods (like a loaf of bread) and services (like getting a haircut at
the hairdresser's). Economists measure inflation regularly to know an economy's state. When the
general price level rises, each unit of currency buys fewer goods and services.

Definition of Inflation: According to many classical writers, inflation is a situation when too much money
chases too few goods and services.

According to C.CROWTHER, “Inflation is State in which the Value of Money is falling and the Prices are
rising.”

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

According to Prof. Samuelson “inflation occurs when general level of prices & cost are rising”.

Johnson also gives his opinion about inflation. According to him “Inflation is an increase in the
quantity of money faster than real national output is expanding.”

According to classical writers inflation is a situation when too much money chases too few goods. It is
an imbalance between money supply and Gross Domestic Product. As per Keynes inflation is an
imbalance between aggregate demand and aggregate supply.

Conclusion: Inflation is considered a global phenomenon. It is defined as a sustained increase in the

price level or a fall in the value of money. When the level of currency of a country exceeds the level of
production, inflation occurs. Value of money depreciates with the occurrence of inflation. Central
banks attempt to limit inflation and avoid deflation in order to keep the economy running smoothly.
Explain the different causes of Inflation?

Introduction: There are various factors that can drive prices or inflation in an economy. Typically, the
main cause of inflation is the increase in the demand of goods and services and at the same time
decrease in the supply of goods and services. Economists have hypothesized a few theories that in
some combination may cause the overall inflation in a given economy. There are main three theories
for the causes of inflation. Those are:

1. Demand-Pull Theory: As per this theory, inflation is caused due to the general increase in the
demand for goods and service. So when demand outgrows the supply, the prices will increase.

2. Cost-Push Theory: As the production costs of goods and services increase, then the companies are
forced to increase the prices of the goods and services. This causes inflation in the economy. It is
also known as wage push theory.

3. Monetary Inflation Theory: According to this theory, the increase in prices is due to the excessive
supply of money in the market. This causes the value of money to drop, and the prices go up.

Causes of inflation: If the demand for a commodity exceeds its supply, then the excess demand
increases the price of the commodity. Also, if the price of the factors of production increases, the price of
the commodity increases too. The common causes that led to inflation are:

1. Primary Causes: In an economy, when the demand for a commodity exceeds its supply, then the
excess demand pushes the price up. On the other hand, when the factor prices increase, the cost
of production rises too. This leads to an increase in the price level as well.
2. Increase in Public Spending: In any modern economy, Government spending is an
important element of the total spending. It is also an important determinant of
aggregate demand. Usually, in lesser developed economies, the Govt. spending increases which
invariably creates inflationary pressure on the economy.
3. Deficit Financing of Government Spending: There are times when the spending of Government
increases beyond what taxation can finance. Therefore, in order to incur the extra expenditure,
the Government resorts to deficit financing. For example, it prints more money and spends it.
This, in turn, adds to inflationary pressure.
4. Increased Velocity of Circulation: In an economy, the total use of money = the money supply by
the Government x the velocity of circulation of money. When an economy is going through a
booming phase, people tend to spend money at a faster rate increasing the velocity of circulation
of money.
5. Population Growth: As the population grows, it increases the total demand in the market.
Further, excessive demand creates inflation.
6. Hoarding: Hoarders are people or entities who stockpile commodities and do not release them
to the market. Therefore, there is an artificially created demand excess in the economy. This also
leads to inflation.
7. Genuine Shortage: It is possible that at certain times, the factors of production are short in
supply. This affects production. Therefore, supply is less than the demand, leading to an increase
in prices and inflation.
 8. Exports: In an economy, the total production must fulfill the domestic as well as foreign demand.
If it fails to meet these demands, then exports create inflation in the domestic economy.
9. Trade Unions: Trade union work in favor of the employees. As the prices increase, these unions
demand an increase in wages for workers. This invariably increases the cost of production and
leads to a further increase in prices.
10. Tax Reduction: While taxes are known to increase with time, sometimes, Governments reduce
taxes to gain popularity among people. The people are happy because they have more money in
their hands. However, if the rate of production does not increase with a corresponding rate, then
the excess cash in hand leads to inflation.
11. The imposition of Indirect Taxes: Taxes are the primary source of revenue for a Government.
Sometimes, Governments impose indirect taxes like excise duty, VAT, etc. on businesses. As
these indirect taxes increase the total cost for the manufacturers and/or sellers, they increase
the price of the product to have a minimal impact on their profits.
12. Price-rise in the International Markets: Some products require to import commodities or factors
of production from the international markets like the United States. If these markets raise prices
of these commodities or factors of production, then the overall production cost in India increases
too. This leads to inflation in the domestic market.
13. Non-economic Reasons: There are several non-economic factors which can cause inflation in an
economy. For example, if there is a flood, then crops are destroyed. This reduces the supply of
agricultural products leading to an increase in the prices of the commodities. Investment in Gold,
Real estate, stocks, mutual funds, and other assets are some of the ways to deal with Inflation.

Conclusion: Inflation is not a blessing for a country. Especially for the middle class and lower class people.
Inflation can occur for a variety of reasons. Those are discussed above. The factors that cause inflation
should be checked.

Discuss the measures of controlling inflation.

Introduction: Inflation is an economic phenomenon used to describe the rising prices of goods and
services year on year. This caused the purchasing power of the consumer decrease because the rate of
increase of wages and income cannot keep up with the rate of inflation.

However, controlling inflation is not a simple task. The rise in prices is a result of many factors like
aggregate demand, increasing the supply of money, etc. So to control inflation we need many measures
working in tandem.

Measures to check inflation: There are three main measures to check inflation.

1. Monetary Measures

The government will employ many policies and formulas to keep the inflation rate in check. One of the
most common and often used measures to do so are monetary measures. Here, the government with
the help of the Reserve Bank of the Country attempt to control the supply of money and credit in the
economy. Controlling the liquidity levels in the market is an effective way to check inflation in the
economy.

Monetary measures used to control inflation include:

(i) Bank rate policy
(ii) Cash reserve ratio and
(iii) Open market operations.

(i) Bank rate policy: It is used as the main instrument of monetary control during the period of
inflation. When the central bank raises the bank rate, it is said to have adopted a dear money
policy. The increase in bank rate increases the cost of borrowing which reduces commercial banks
borrowing from the central bank. Consequently, the flow of money from the commercial banks to
the public gets reduced. Therefore, inflation is controlled to the extent it is caused by the bank
credit.

(ii) Cash Reserve Ratio (CRR) : To control inflation, the central bank raises the CRR which reduces
the lending capacity of the commercial banks. Consequently, flow of money from commercial
banks to public decreases. In the process, it halts the rise in prices to the extent it is caused by
banks credits to the public.
(iii) Open Market Operations: Open market operations refer to sale and purchase of government
securities and bonds by the central bank. To control inflation, central bank sells the government
securities to the public through the banks. This results in transfer of a part of bank deposits to
central bank account and reduces credit creation capacity of the commercial banks.

2. Fiscal Measures

Apart from monetary policy, the government also uses fiscal measures to control inflation. The two main
components of fiscal policy are government revenue and government expenditure. In fiscal policy, the
government controls inflation either by reducing private spending or by decreasing government
expenditure, or by using both.

Of the two it is more preferable to control private spending. This is done by increasing the taxes and tax
liabilities of private companies and businesses. This, in turn, forces the companies to spend less money
thus controlling inflation.

When this is not possible, the government can limit government expenditure. However, this is not the
best scenario as it may delay important social welfare programmes related to education, health, defense
and other such important aspects of the society.

3. Price Control

Another method for ceasing inflation is preventing any further rise in the prices of goods and services. In
this method, inflation is suppressed by price control, but cannot be controlled for the long term. In such
a case, the basic inflationary pressure in the economy is not exhibited in the form of rise in prices for a
short time. Such inflation is termed as suppressed inflation.

The historical evidences have shown that price control alone cannot control inflation, but only reduces
the extent of inflation. For example, at the time of wars, the government of different countries imposed
price controls to prevent any further rise in the prices. However, prices remain at peak in different
economies. This was because of the reason that inflation was persistent in different economies, which
caused sharp rise in prices. Therefore, it can be said inflation cannot be ceased unless its cause is
determined.

Conclusion: Inflation is undoubtedly a complex and serious problem. It is not possible to control it by any
particular or special method. For this, in order to control inflation, it is necessary to take various direct
measures including monetary policy as well as implementation of fiscal policy.