ECONOMICS

CH.13.INFLATION
Std. 10
2024-25

Meaning of Inflation: Inflation is commonly understood to be a situation in which prices of goods and
services persistently rise at a fast pace.
Meaning of Wholesale Price Index (WPI): Index number which represents overage change in the
wholesale price of the commodities is known as wholesale price index (WPI).
Meaning of Consumer Price Index (CPI): It measures the average change overtime in the price paid by
the ultimate consumer of a specific basket of goods and services.
Meaning of Food Basket: Food basket (farmer’s basket) consists of specified food items of daily individual
consumption. The average price is taken as a measure of food inflation.
A constant rise in the price level of all agricultural food items is called food inflation.

STAGES/TYPES OF INFLATION
i. 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, prices rise about 2 per cent annually which is regarded safe and essential for
economic growth. It is the first stage of inflation.

ii. Walking Of Trotting Inflation:

When price rise moderately and the annual inflation rate is in single digit, it is called walking or
Trotting inflation.
The rate of rise in price, is in the intermediate range of 3 to 6 per cent per annum or less than
10 per cent. Such inflation is warning signal for the government to control it before it turns into
running inflation.

iii. Running inflation:

When price rise rapidly at a rate or speed of around 10% to 20% per annum, it is called
running inflation. It affects the poor and middle class adversely. Their economic position becomes
worse. Government should take necessary and immediate steps to control it, otherwise it will
convert into hyper inflation.

iv. Hyperinflation:
When prices rise very fast at double- or triple-digit rates from more than 20 to 100 per annum
or more it is usually called hyperinflation or galloping inflation. Such a situation brings total
collapse of the monetary system because of the continuous fall in the purchasing power of money.
This kind of inflation took place in Germany after the First World War and in China after the
Second World War.

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 ECONOMICS
CH.13.INFLATION
Std. 10
2024-25

CAUSES OF INFLATION –
1. Demand Pull Inflation
2. Cost Push Inflation

1. Demand Pull Inflation /Excess Demand Inflation

Demand pull inflation refers to a situation in which prices rise because the demand for goods and services
exceeds their total supply available at current prices.
Causes of Demand-pull inflation -
1. Increase in Money Supply
Increase in money supply leads to increase in aggregate demand. Supply of money includes currency with the
public and demand deposit at banks. This is money in spendable form. This trend increases demand for goods
and services within the economy.

2. Increase in Disposable Income

When the disposable income of the people increases it raises their demand for goods and services, leading to
demand pull inflation. This can happen when there is low taxation or if interest rates are too low to attract
people to save and invest rather than spending.

3. Increase in Population:
Increase in population is for rise in prices. Increase in population means increased demand for consumer goods.
It increases the aggregate demand for goods and services and puts pressure on the existing supply of goods
and services.
4. Increase in Export Demand:
Expansion in foreign demand as a result increase in exports will raise the income of poor people. This will
push the demand of goods and services within the country.
5. High investment:
Heavy investments made by the government and private industrialists have results in continuous increase in
the prices of capital goods and other items of production.

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 ECONOMICS
CH.13.INFLATION
Std. 10
2024-25

2. Cost Push Inflation

According to this theory, the prices, instead of being pulled up by demand factors (i.e., excess demand) may
also be pushed up as a result of a rise in the cost of production. It is the inflation caused by cost factors.
Causes of Cost Push Inflation-
1. Rise in Wages: Rise in wages has been considered as the main determinant of cost push inflation. This is
because in modern times, workers have organised themselves into strong trade unions which have succeeded
in getting higher wages for their members.
2. Increase in the Price of Basic Materials: Cost push inflation is also caused by increase in the prices of some
basic materials, such as steel, basic chemicals, oil, etc. Since, these materials are used directly or indirectly in
almost all the industries, any increase in their prices affect the whole of the economy and the prices everywhere
tend to increase.
3. Higher Taxes: Another important cause of cost push inflation is the imposition of higher taxes on
commodities, like excise duties, sales tax etc. These taxes are largely passed over by the producers to the
consumers by the amount of taxes.
4. Oil price hike and Global inflation:
Rise in price of crude oil in international market leads to rise in prices of diesel, petrol and other petroleum
products in India.
5. Administrative price:
It refers to price fixed by the government for essential goods. Price level in the country has increased due to
frequent hike in the administered prices like railways, port charges, coal, steel, and goods produced by public
sector industries.
EFFECTS OF INFLATION –
1. EFFECTS ON PRODUCTION:
Positive effects:
Producers / Businessmen tend to gain during inflation because-
1. Prices of their inventory (stock of goods and raw materials) go up and thereby increase their profits.
2. Prices rise at a faster rate than the cost of production.
3. They are generally borrowers of money for business purposes thus they gain in terms of real income while
repaying.

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 ECONOMICS
CH.13.INFLATION
Std. 10
2024-25

Negative effects:
1. Misallocation of Resources: Inflation leads to maladjustments in production. Producers divert their
resources from the production of essential commodities to non- essential (i.e., luxury goods) from which they
expect higher profits.
2. Reduction In Saving: When prices rise rapidly, more money is now needed to buy the same amount of goods
and services than before. It thus reduces saving and hence investment. As a result, production is adversely
affected.
3. Discourages Foreign Capital: Inflation discourages the inflow of foreign capital into the country. Foreigners
do not like to invest in those countries where prices are rising. Rising cost of raw materials and other inputs
make foreign investment less profitable.
4. Hoarding: During inflation, hoarding of larger stocks of goods becomes profitable. As a result of this, the
available supply of good in relation to demand decreases. This results in black-marketing. The producer then
sells their goods in black market which increases inflation.
5. Fall in Quality:
Inflation tends to create a sellers' market. Sellers have command on price because of excess demand.
Therefore, sellers do not bother much about the quality of goods produced, instead they concentrate more on
earning profit.
2. EFFECTS ON DISTRIBUTION
I) Wage and salaried class or fixed income group:
1. Fixed income group (which include wage and Salary earners, pensioners) suffer during inflation. It is due
to the reason that wages and salaries do not increase in the same proportion in which the prices or the cost of
living rises.
2. But those workers and employees who have formed strong trade unions stand to lose less in comparison to
those who are not organised.
3. Due to inflation, the purchasing power of money falls. As a result of it, fixed income earners tend to buy
less amount of goods and services than before even when there is a little rise in their wages.
II) Business Community:
Inflation favourably affects people with flexible incomes. Businessmen like entrepreneurs, traders, producers,
etc. tend to gain during inflation because –
1. Prices of their inventory (stock of goods and raw materials) go up and thereby increase their profits.
2. Prices rise at a faster rate than the cost of production.
3. They are generally borrowers of money for business purposes thus they gain in terms of real income while
repaying.
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 ECONOMICS
CH.13.INFLATION
Std. 10
2024-25

SAMPLE QUESTIONS:
1. Study the relationship in the first pair of words and complete the second pair.
i) Creeping inflation: 1% to 2% p.a. ii) Running inflation: _____________ p.a.
a) 3% to 6%
b) 20% to 100%
c) 30% to 40%
d) 10% to 20%

2. An inflation caused by an enhanced wage of labour is _______________

a) demand-pull inflation.
b) cost-push inflation.
c) hyperinflation.
d) galloping inflation

3. A farmer’s ________ basket consists of specified food items of daily individual consumption.
a) exchange
b) consumption
c) distribution
d) food

4. Demand pull inflation may be caused by__________.

a) increase in excise duty
b) increase in population
c) increase in price of basic raw materials
d) increase in cost of production

5. Statement1: A high inflation can reduce the purchasing power of consumers.

Statement 2: Inflation benefits borrowers by reducing the value of debt.
a) Statement 1 is true; Statement 2 is false.
b) Statement 1 is false; Statement 2 is true.
c) Both statements are true.
d) Both statements are false.
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Instructions to study this chapter:
• Please read your book for detailed information on the above topics.
• The length of the answer depends on the marks in the question paper.
• Examples should be used to elaborate your points for this chapter.
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