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Impact of Inflation

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Impact of Inflation
Format
Introduction
What is inflation?
Measurement of Inflation
Causes and theories of inflation
Types of inflation
Effects of inflation
Fiscal policy
Monetary policy
Last two years in India
Issues:-
1-Inflation in different sectors
Factors-
1-supply constraints
2- demand pressures
3- domestic factors
Effects of inflation-
Control measures adopted in India
Conclusion (with future perspective)

Inflation
A persistent rise in prices in an economy over a period of time is referred to as inflation. Inflation or rate of inflation is the percentage change in overall price level from one year to the next year. Inflation is an outcome of one of the types of disturbances in goods market, which has something called aggregate demand (AD) and aggregate supply (AS). When AD > AS, then the price of the good increases and it is called inflation. During inflation, it is very much possible that the prices of some goods may fall, but the overall trend of the prices is upward.
Measurement of Inflation: The rate of change in the general price per year is expressed in percentages. The simple inflation rate in period t (Pt) over the last one year (Pt-1) is given by
{(Pt – Pt-1) / Pt-1} * 100, here Pt and Pt-1 are 52 week average of WPI in a particular year and the year before that. The above formula is used when the compounding is done once in an year. If compounding is done on a continuous basis then
Pt = ln (Pt / Pt-1)
There are some price indices which are used to calculate inflation. A Price index refers to weighted average of the price of a basket of goods and services. In constructing price indexes, a weight of individual prices of each good is taken into account based on its economic importance (its relative importance in consumer expenditure budgets). Important price indices used are Consumer price index (CPI), GDP price index, Producer price index (PPI) and Wholesale price index (WPI). Of the indices mentioned above WPI is the most widely used


References: 1. http://www.investopedia.com/articles/04/051904.asp#axzz2DudAJmE7 (22:16 on 02/12/2012) 2
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