Inflation, Causes and Solutions

Topics: Inflation, Tax, Money Pages: 5 (1365 words) Published: February 29, 2012
A sustained rise in the prices of commodities that leads to a fall in the purchasing power of a nation is called inflation. Although inflation is part of the normal economic phenomena of any country, any increase in inflation above a predetermined level is a cause of concern. How is inflation measured

Inflation in India is measured through a WPI ( wholesale price index ) . In India, the wholesale price index (WPI), rate consisted of three main components - primary articles, which included food articles, constituting 22% of the index; fuel, constituting 14% of the index; and manufactured goods, which accounted for the remaining 64% of the index

Today this is around 8 % in india which is very high . Last year this touched double digit figures at 10% .

Cause of inflation - General theory
* printing of more money by the government,
* a rise in production and labor costs,
* high lending levels,
* a drop in the exchange rate
Demand Pull theory
a rise in prices due to
* increase in demand in excess of the supplies
* An increase in the quantity of money in circulation relative to the ability of the economy to supply leads to increased demand, thereby fuelling prices. The case is of too much money chasing too few goods. * An increase in demand could also be a result of declining interest rates, * a cut in tax rates or increased consumer confidence.

The Cost Push theory,
Inflation occurs due to increase in production cost .
The cost of production can rise because of
* rising labor costs
* when the producing firm is a monopoly or oligopoly and raises prices * cost of imported raw material rises due to exchange rate changes, * external factors, such as natural calamities

* an increase in the economic power of a certain country. * An increase in indirect taxes

A classic example of cost-push or supply-shock inflation is the oil crisis that occurred in the 1970s, after the OPEC raised oil prices. The US saw double digit inflation levels during this period. Since oil is used in every industry, a sharp rise in the price of oil leads to an increase in the prices of all commodities.

Indian scenario
The average annual GDP growth in the 2000s was about 6% and during the second quarter (July-September) of fiscal 2006-2007, the growth rate was as high as 9.2%. All this growth was bound to lead to higher demand for goods. However, the growth in the supply of goods, especially food articles such as wheat and pulses, did not keep pace with the growth in demand. As a result, the prices of food articles increased. According to Subir Gokarn, Executive Director and Chief Economist, CRISIL, "The inflationary pressures have been particularly acute this time due to supply side constraints [of food articles] which are a combination of temporary and structural factors." Causes of Price Rise in INDIA

Inflation is bringing us true democracy. For the first time in history, luxuries and necessities are selling at the same price.There cannot be any single cause for price rise of essential commodities continually over the years. 1. Growth in demand due to Population growth

The inflationary pressure on the i economy partly through imbalance in demand and supply. The ever increasing demand has been primarily due to our ever increasing and bulgeoning population. Even a few decades ago it used to be around 12 to 14 million every year which has gone up to nearly 20 million every year. This increase in population automatically creates an increased demand for food and essential commodities which results in a persistent gap between demand and supply in almost all consumer goods and services. It is indeed unfortunate that we have not been able to evolve a fixed and common norm to check the spiraling population, something which China has been able to achieve. Our politicians, monetarists and structuralists have chosen to ignore or underplay the effect of...
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