Inflation

KUSHAL JAIN
Inflation

Persistent Upward
movement in
General price Level Decline of Purchasing
Power
Causes

Aggregate Supply of goods and services

Aggregate demand for goods and services
decreases (due to rise in cost of
is rising and it exceeds aggregate supply at
production) while aggregate demand
full employment level.
remains constant at full employment level.
Types of Inflation

Demand – Pull Inflation Cost – Push Inflation

Aggregate Demand

It is the total demand of all

products (goods and services)
in an economy. It consists of
four components of demands.

• Consumption (C)

Aggregate Demand = • Investment (I)

• Government Spending (G)
C + I + G + (X-M) • Net Exports (i.e. Export-Import)
(X-M)
Aggregate supply

Aggregate supply is the

total output of goods and
services that firms want
to produce at each
possible price level.
We already know

E q u i l i b r i u m : w h e n e co n o my i s f u n ct i o n i n g a t f u l l e m p l oy m en t, a g g r eg a te s u p p l y w i l l
m a t ch a g g r eg a te d e m a n d . At t h i s E q u i l i b r i u m w e w i l l h ave g e n e ra l p r i ce l e vel .

At t h i s p o i n t , i f a g g r eg a te d e m a n d r i s e s, i n f l a t i o n o ccu r s . Why ?

Be ca u s e s i n ce e co n o my i s a t f u l l e m p l oy m ent , s o i t i s p r o d u ci n g a t i t s f u l l ca p a ci t y. I t
ca n n o t p r o d u ce a ny f u r t h er. T h u s a ny i n cr e a se i n a g g r e g ate d e m a n d w i l l r e s u l t i n
i n cr e a se i n p r i ce l e ve l s, i .e . In f l a t i o n . T h i s t y p e o f i n f l a t i o n i s k n o w n a s D e m a n d Pu l l
In f l a ti o n

Li ke w i se,

I f a g g r eg a te s u p p l y i n e co n o my ( a t e q u i l i b r i u m ) d e cl i n e s , i t w i l l a l s o l e a d t o In f l a t i o n .
T h i s t y p e o f In f l a t i o n i s k n o w n a s C o s t Pu s h In f l a t i o n .
 What Is Full Employment?

Full employment is an economic situation in which all available labor resources are being
used in the most efficient way possible.

True full employment is an ideal—and probably unachievable—situation in which anyone who

is willing and able to work can find a job, and unemployment is zero.

It is a theoretical goal for economic policymakers to aim for rather than an actually observed
state of the economy. In practical terms, economists can define various levels of full
employment that are associated with low but non-zero rates of unemployment
Demand-Pull Inflation

Demand for Goods &

Services more than Supply

More money Chases Less

Quantity

Excess Demand Relative to

Supply

Increased Money
Expenditure
Causes of demand pull inflation

Increase in
Household
Consumption

Rise in
Rise in Net
Government
Exports
Expenditure

Increase in
Investments
Cost-Push Inflation

Increase in Inflation
Total cost of
production once set in
motion in
one
industry
spreads
Factors of throughout
production try
Growing Factor the
to increase
Cost
their share, by economy
Rising Prices
Causes of cost push inflation

Increase in
prices of
raw
materials

Increase in
Increase in
wages of
prices of
the
imports
employees

Increase in
Profit
margin by
firms
 KEY TAKEAWAYS

Cost-push inflation is the decrease in the aggregate supply of goods and services
stemming from an increase in the cost of production.

Demand-pull inflation is the increase in aggregate demand, categorized by the four

sections of the macroeconomy: households, business, governments, and foreign buyers.

An increase in the costs of raw materials or labor can contribute to cost-pull inflation.

Demand-pull inflation can be caused by an expanding economy, increased government

spending, or overseas growth.
Identify the type of inflation

Increase in Money Supply

Increase in Cost of Production

Decrease in output

Increase in Indirect Taxes

Decrease in Direct Taxes

Increase in prices of crude oil

Increase in Household Income

Increase in Population

Hoarding & Speculation

Increase in Government Expenditure

 Inflationary Gap

What is Inflation? Hence, if aggregate

• Aggregate demand > demand exceeds the
Aggregate supply of goods aggregate value of The inflationary gap
and services
output at the full results in price rise.
• The excess is Inflationary
employment level, Prices will continue to
Gap
there exist an rise till this gap exists.
inflationary gap in the
economy.
Steps to combat demand pull inflation

Government Policy

Monetary Policy
Steps to combat Cost-Push Inflation

Government Subsidies

Improving supply side factors such as

dismantling APMCs, Fertilzer subsidy reform etc.
Inflation due to structural factors

Similarly, structural
Under developed
bottlenecks in agricultural Resource constraints (such
transportation sector will
sector such as APMCs, as government Budget
increase logistic cost and
involvement of constrain) to finance
will result in overall
middlemen, imperfect infrastructure
increase in prices of
price discovery leads to development.
commodities
rise in food prices
Positives of Inflation: Growth

Moderate
Inflation(Demand)

Increase in Money
Profit to Suppliers
Supply

Welfare,
Increase in
development and
production
Growth

Rise in Government Increase in

Revenues Investments

Employment
 Negatives of inflation

Erodes Purchasing Power

Deteriorates Standard of Living

Raises the Cost of Borrowing: Large Demand for Loans

Creditors Loss and Debtors Gain

Reduces Savings which results in less Capital Formation

Increases Inequality
Base effect

T h e b a s e e f fect r e l a tes t o i n f l a t i o n i n t h e co r r esp o n di n g p e r i o d o f t h e p r e v i o u s ye a r, i f

t h e i n f l a t i o n ra t e wa s t o o l o w i n t h e co r r e sp on d i n g p e r i o d o f t h e p r e v i ou s ye a r, e ve n a
s m a l l e r r i s e i n t h e P r i ce In d e x w i l l a r i t h m e ti ca l l y g i ve a h i g h ra t e o f i n f l a t i o n n o w.

O n t h e o t h e r h a n d , i f t h e p r i ce i n d e x h a d r i s e n a t a h i g h ra t e i n t h e co r r es po n d i n g p e r i o d
o f t h e p r e vi o u s ye a r a n d r e co rd ed h i g h i n f l a t i o n ra t e, a s i m i l a r a b s o l u t e i n cr e a se i n t h e
p r i ce i n d e x n o w w i l l s h o w a l o w e r i n f l a t i o n ra t e n o w.

Fo r E x a mpl e:

P r i ce In d e x 1 0 0 g o e s t o 1 5 0 , a n d t h e n t o 2 0 0. T h e i n i t i a l i n cr e a se o f 5 0 , g i ve s t h e
p e r cen t ag e i n cr e a se a s 5 0 % b u t t h e s u b s e q uen t i n cr e a se o f 5 0 g i ve s t h e p e r ce nt a ge
i n cr e a se a s 3 3 .3 3%. T h i s h a p p e n s a r i t h m et i ca l l y a s t h e b a s e o n w h i ch t h e p e r cen t ag e i s
ca l cu l a t e d h a s i n cr e a sed f r o m 1 0 0 t o 1 5 0 .
Measurement of inflation

Wholesale Price
Index (WPI)

Consumer Price
Index (CPI)

Producers Price
Index (PPI)
CPI vs WPI

23
24
 Measurement of inflation

Inflation can be described as the general rise in the price of goods and services
in an economy over time. It’s calculated by tracking the increase in prices of
essentials.

The primary index that tracks the change in retail prices of essential goods and
services consumed by Indian households is the Consumer Price Index or CPI.

The other index that measures inflation is the Wholesale Price Index (WPI).
Components of CPI

Food and
Beverages
Miscellaneous
45.86
28.32

Pan, tobacco Housing

and intoxicants
2.38 10.07

Clothing and
Footwear Fuel and Light
6.84
6.53
 Segment specific CPIs

CPI – Industrial Workers (CPI -IW): This index measures the change in
the price of commodity basket consumed by the industrial workers

CPI – Agricultural Labourers (CPI -AL): This index measures the change in
the price of commodity basket consumed by the agricultural labourers

CPI – Rural Labourers: This index measures the change in the price of
commodity basket consumed by the rural labourers
 Consumer Price Index (CPI)

The index assigns different weights to various goods and services in the basket and
tracks the movement of their prices.

It also tracks the price movement of the entire basket on a pan-India level to
calculate the overall inflation figure or CPI inflation.

CPI measures the average change in prices of fixed baskets of goods and services
that households purchase for the purpose of consumption. It is also called Retail
Inflation.
 Consumer Price Index (CPI)

CPI – Rural: This index measures the change in the price of commodity basket
consumed by the rural Population

CPI – Urban: This index measures the change in the price of commodity basket
consumed by urban population

CPI – Combined: It is computed by combining CPI Rural and CPI Urban Index The base
year for the above three indices is 2011-12 and are published monthly by the National
Statistical Office (NSO), Ministry of Statistics and Programme Implementation.
 Wholesale Price Index (WPI)

T h e WPI i s ave ra ge ch a n g e o f p r i ce s o f a f i xe d b a s ke t o f g o o d s a t t h e f i r s t p o i n t o f b u l k
s a l e i n th e do me s ti c ma r ke t ove r a g i ve n p e r i o d o f ti me

WPI m e a s u res t h e i n f l a t i o n a t w h o l e s al e l e ve l .

• T h e p r e s ent b a s e ye a r o f WPI i s 2 0 1 1 -12

• N o d a l O f f i ce fo r C o m p i l a t i o n a n d r e l ease o f WPI i s t h e O f f i ce o f E co n o m i c Ad v i s er,

D e p a r t men t fo r P r o m o ti o n o f In d u s t r y a n d In t ern a l Tra d e, Mi n i s t r y o f C o m m e rce a n d
In du s tr y.

• WPI f i g u r es a r e p u b l i s h e d o n a m o n t h l y b a s i s .
Base revision in May 2017

T h e B a s e Ye a r f o r W PI w a s c h a n g e d f r o m 2 0 0 4 - 0 5 t o 2 0 1 1 - 1 2 i n M a y 2 0 1 7 .

T h e n u m b e r o f i t e m s i n t h e b a s ke t h a s b e e n i n c r e a se d f r o m 6 7 6 t o 6 9 7 .

N u m b e r o f q u o t a t i o n h a s b e e n e n h a n c ed f r o m 5 8 4 2 t o 8 3 3 1 t o e n s u r e c o m p r e he ns i ve c o ve ra g e
a n d r e p r e se n t a t i ve n es s

N e w d e f i n i t i o n o f w h o l e s a l e p r i c e i n d e x d o e s n o t i n c l u d e t a x e s i n o r d e r t o r e m o ve t h e i m p a c t
o f f i s c a l p o l i c y. T h i s a l s o b r i n g s n e w W PI s e r i e s c l o s e r t o t h e P r o d u c e r P r i c e I n d e x a n d i s i n
c o n s o n a n c e w i t h t h e g l o b a l p ra c t i c e s .

T h e i t e m l e ve l i n d i c es a r e b e i n g c o m p i l e d b a s e d o n s t a t i s t i c a l l y r o b u s t G e o m et r i c m e a n a s
c o m p a r e d t o A r i t h m e t i c m e a n u s e d i n t h e W PI 2 0 0 4 - 0 5 s e r i e s .

A s a p a r t o f t h e r e v i s e d W PI s e r i e s , a s e p a ra t e W PI Fo o d I n d e x h a s b e e n l a u n c he d . W PI f o o d
i n d e x m e a s u r e s t h e c h a n g e s i n p r i c e s o f f o o d i t e m s a t t h e l e ve l o f p r o d u c e r s . W PI Fo o d I n d e x
a l o n g w i t h C PI Fo o d P r i c e I n d e x w o u l d h e l p m o n i t o r t h e f o o d i n f l a t i o n e f fec t i ve l y i n I n d i a .
Components of WPI

Primary Articles (eg- Food Articles, Vegetables, Milk,

Minerals etc)

Fuel and Power (eg- LPG, Petrol etc)

Manufactured Products (eg- manufacture of food

products, sugar, manufacture of textiles etc)
Wholesale Price Index (WPI)

Major Group Weights

Base year-2011-12

Primary Articles 22.62

Fuel & Power 13.15

Manufactured Products 64.23

All Commodities 100.00

 CPI VS WPI

WPI CPI

It reflects change in averages prices for bulk sale It reflect the average change in prices at retail
of commodities at wholesale level level paid by consumer

Weights of items in CPI is based on average

Weights of items in the WPI are based on
household expenditure taken from consumer
Production values
expenditure surveys.
Weightage of Food group 39.06%.
Weightage of Food Group – 24.4% (Food Articles Thus, CPI has higher weightage of food
+ manufactured Food Products) products in comparison to WPI

CPI includes services (like housing, education,

WPI does not include services.
medical care etc)
Key Differences

Fo r i n s t a n ce , t h e WPI i s d o m i n a t e d b y t h e p r i ce s o f m a n u f a ct u red g o o d s w h i l e t h e C PI i s
d o m i n a t e d b y t h e p r i ce s o f fo o d a r t i cl e s. A s s u ch , b r o a d l y s p e a k i n g , i f fo o d p r i ce s g o u p
s h a r p l y, i t w i l l b u m p u p t h e r e t a i l i n f l a t i o n ra t e f a r m o r e t h a n i t w o u l d s p i ke t h e
w h o l e sa l e i n f l a ti o n ra t e . T h e r e verse w i l l h a p p e n w h e n pr i ce s o f ma n u f a ctu r ed pr o du cts
( s u ch a s T V s a n d ca r s ) r i s e s h a r p l y
Producer Price Index

P r o d u c er P r i c e I n d e x ( P PI ) m e a s u r e s t h e a ve ra g e c h a n g e i n t h e p r i c e o f g o o d s a n d s e r v i c e s
w h i c h i s r e c e ive d b y t h e p r o d u c e r s .

H o w i s P PI d i f fe r e n t f r o m W PI ?

F i r s t l y, W PI c a p t u r e s t h e p r i c e c h a n g e s a t t h e p o i n t o f b u l k t ra n s a c t i o n s a n d m a y i n c l u d e
s o m e t a x e s l e v i ed a n d d i s t r i b u t i o n c o s t s u p t o t h e s t a g e o f w h o l es a l e t ra n s a c t i o n s . P PI
m e a s u r e s t h e a ve ra g e c h a n g e i n p r i c e s r e c e i ve d b y t h e p r o d u c e r a n d e x c l u d e s i n d i r e c t t a x e s .

S e c o n d l y, We i g h t s o f i t e m s i n W PI a r e b a s e d o n n e t t ra d e d va l u e w h e r e a s i n P PI w e i g h t s a r e
d e r i ved f r o m S u p p l y U s e Ta b l e .

T h i r d l y, P PI r e m o ves t h e m u l t i p l e c o u n t i ng b i a s e s i n h er e n t i n W PI . P PIs c a n b e c o m p i l ed
s e p a ra t el y f o r O u t P PIs , I n p u t P PIs a n d E x p o r t a n d I m p o r t P PIs . I n b u i l d S t a g e o f P r o c e s s i n g
i n d i c e s c a n b e c o m p i l e s t o a vo i d m u l t i p l e c o u n t i n g .

F i n a l l y, W PI d o e s n o t c o ve r s e r v i c es a n d w h e r e a s P PI i n c l ud e s s e r v i c es .
How is PPI different from Consumer Price Index (CPI)?

F i r s t l y, P PI e s t i m a tes t h e ch a n g e i n ave ra g e p r i ce s t h a t a p r o d u cer r e cei ves w h i l e C PI

m e a s u res t h e ch a n g e i n ave rag e p r i ce s t h a t a co n s u m e r p ay s . T h e p r i ce s r e ce i ved b y t h e
p r o d u ce rs d i f fe r f r o m t h e p r i ce s p a i d b y t h e co n s u m e rs o n a cco u n t o f va r i o u s f a ct o r s
s u ch a s ta xe s, tra de a n d t ra n s p o r t ma r g i n , d i s t r i bu ti o n co s t e tc..

S e co n d l y, We i g h t s o f i t e m s i n C PI a r e d e r i ved f r o m C o n s u m e r E x p e nd i t u re S u r ve y s
w h e rea s fo r P PI i t i s ca l cu l a t e d o n t h e b a s i s o f S u p p l y U s e Ta b l e .

F i n a l l y, C PI b a s e d i n f l a t i o n e s t i m a tes a r e u s e d a s n o m i n a l a n ch o r fo r Mo n e t a r y Po l i cy
fo r m u l a t i o n i n g e n e ra l , w h e rea s P PI e s t i m ates a r e u s e d a s d e f l a to rs a n d fo r i n d e x a t i o n
o f co n t ra ct s e t c
Index of Industrial Production

I I P i s a n i n d i ca t o r t h a t m e a s u res t h e ch a n g e s i n t h e vo l u m e o f p r o d u ct i o n o f i n d u s t r i a l
p r o d u ct s d u r i n g a g i ve n p e r i o d .

I t i s co m p i l e d a n d p u b l i s h e d m o n t h l y b y t h e N a t i o n a l S t a t i s t i ca l O f f i ce ( N S O ) , Mi n i s t r y o f
S t a t i s t i cs a n d P r o g ra mme Im p l e men ta t i on .
Classification

Broad sectors, namely, Mining, Manufacturing, and

Electricity.

Use-based sectors, namely Basic Goods, Capital

Goods, and Intermediate Goods.
About Eight Core Sectors

These comprise 40.27% of the weight of items

included in the Index of Industrial Production
(IIP).

The eight core sector industries in decreasing order

of their weightage: Refinery Products> Electricity>
Steel> Coal> Crude Oil> Natural Gas> Cement>
Fertilizers.
Inflation and Related Terms

1 . In f l a t i o n 10. Walking/Trotting
inflation
2 . D e f l a t i on
11. Suppressed /
Repressed inflation
3 . D i s i n f l a ti o n

12. Monetary Inflation

4 . Re f l at i o n
13. Bottleneck
5. Stagflation Inflation

6 . H e a d l i n e In f l a t i o n 14. Galloping/Running
inflation
7 . C o r e In f l a t i o n
15. Hyperinflation/
8 . C r e e pi ng i n f l at i on Runaway

9 . S t r u ct u ra l In f l a t i o n 16. Inflation Tax

42
Stagflation

Demand
Cost Push
Pull Stagflation
Inflation
Inflation
Stagflation

High Stagnant
High Inflation Stagflation
Unemployment Growth
Deflation

Opposite Of Inflation

Persistent Fall in
Genera Price
Increase in
Level
Purchasing power
 Deflation

Deflation occurs when inflation rate falls below 0%.

Thus inflation is negative during Deflation.

It increases the value of Money

It increases the Purchasing power of money. People can buy more from same
amount of money.
 Dis-inflation

Disinflation is a temporary slowing of the pace of price inflation. It is used to describe instances when
the inflation rate has reduced marginally over the short term. It should not be confused with deflation,
which can be harmful to the economy.

The general price level rises in disinflation, but the rate of inflation decreases over the period.

It is slower rate of inflation. It means that there is still rise in prices but overall rate is slow. It is
simply a slowing of Inflation.

For example – If the inflation rate for years 2016, 2017, 2018, 2019 are 10%, 8%, 6% and 4%
respectively.
 Deflation vs Dis-Inflation

Deflation Dis-Inflation

Prices of goods and services do not fall. Their

price rise but overall rate is slow
Prices of goods and services fall.

It is overall fall in inflation rate

It is result of decline in overall price level in the
economy.

Inflation is positive. However, rate of inflation

Inflation is negative slows down

Usually not harmful to the economy

Harmful to the economy
Skewflation

I t m e a n s t h a t s o m e s e ct o rs a r e f a ci n g i n f l a t i o n w h i l e o t h e r s e ct ors o f e co n o my d o n o t .

Fo r e x a m p l e – Fo o d p r i ce s m ay r i s e d u e t o d u e t o i n cr e a se i n p r i ce s o f o n i o n a n d
t o m a t o es, w h e rea s p r i ce s o f o t h e r co m m o d i t i e s r e m a i n s a m e
Core Inflation

Core Inflation is Headline Inflation minus the food and

fuel inflation.

Core Inflation is also known as underlying inflation

It is a reflection of long term inflationary trend in the

economy
Inflation and Related Terms

R un aw ay/ H yper i nflat i on : W h e n t h e r at e o f i n f l at i on i s e x t r e m ely h i g h , i t i s c al l e d

r un aw ay / hyp eri n flat i on i n f l at i o n. I n t h i s s i t uat i o n , m o n ey b e c o m es w o r t h les s an d n e w c ur r e n c y m ay
h av e t o b e i n t r o d uc ed .

R un n i ng/ Gallo pi ng i n f l at i on : W h e n t h e r a t e o f i n f l a t i on r e a c h e s d o u b l e d i g i t s ( > 1 0 % ), i t i s c a l l e d

r un n i ng/ gallo pi ng i n f l at i on .

•B o t t l en ec k I n f l at i o n: W h e n s up p l y r e d uc e s d r am at i c al ly w h i l e d e m an d r e m ai n s c o n s t an t , t h e r i s e i n
p r i c e s i s c al l e d b o t t l ene c k i n f l at i on. S up p l y - s i de i s s ue s , d an g e rs , o r m i s m an agement c an l e ad t o
s uc h c i r c um s t an c es .

R e f l ati on : T o r e c o v er f r o m t h e r e c e s s i on , R B I t r i e s t o i n c r e as e t h e m o n e y s up p l y an d t h e
g o v er nmen t t r i e s t o g i v e f i s c al s t i m ulus i n t h e f o r m o f t ax c ut s o r s ub s i d i e s . T h e s e ac t i o n s t ak e t h e
e c o n o my f r o m a d e f l at i onar y p at h t o w ar ds a r e f l at i onar y p at h . R e f l at io n i s t h us , t h e i n c r e as e i n
p r i c e l e v els w h e n t h e e c o n o my r e c o v ers f r o m r e c e s s i o n.

51
Inflation and Related Terms

O p e n i n f l at i o n: A s i t uat i o n w h e re t h e p r i c e l e v e l r i s e s w i t h out an y p r i c e c o n t r o l m e as ur e s b y t h e
g o v er nmen t i s c al l e d o p e n i n f l at i on

S up p r e s s ed / R e p r es s e d i n f l at i on : D ur i n g w ar o r p an d e m ic l i k e s i t uat i o n s , t h e g o v e rnme nt i m p o s e s
p r i c e c o n t r o ls an d r at i o n i n g t o k e e p p r i c e s un d e r c h e c k . B ut t h e m o m e nt t h e s e c h e c k s ar e
w i t h d rawn t h e p r i c e s o f t h e g o o ds an d s e r v i c e s r i s e . T h i s r i s e i n p r i c e s i s c al l e d r e p r e s s ed i n f l at i on .

H e ad l i n e I n f l at i on : H e ad l i n e i n f l at i on i s t h e m e as ur e o f t o t al i n f l at i o n w i t h i n an e c o n o my. I t i s
us ual l y p r e s e n ted i n t h e f o r m o f C P I o r W P I .

C r e e pi ng i n f l at i on : I f t h e r at e o f i n f l at i on i s l o w ( up t o 4 % ) , i t i s c al l e d c r e e p i ng i n f l at i on . I t i s s af e
an d e s s e n t i al f o r jo b c r e at i o n an d e c o n o mi c g r o wth .

W al k i n g/ T ro tt ing i n f l at i o n: W h e n t h e r at e o f i n f l at i o n i s m o d er at e ( 4 - 9 % ), i t i s c al l e d
w al k i ng/ tr ot ti ng i n f l at i on .

52
Inflation Tax

" Inf l atio n tax" i s a te rm u s e d to d e s c ribe th e n e gative i m p ac t o f i nf latio n o n p u rc h a sing p o we r a n d th e re a l

va l u e o f m o n ey.

It' s n o t a n a c tu a l tax i m p o s e d by a go ve rn m ent, b u t rath e r a m eta p ho ri cal way to exp re ss h o w i nf latio n ca n

f u n c tio n s i m ilarly to a tax o n i n d iv iduals a n d b u s ines ses .

53
How inflation can be viewed as a kind of "tax“?

1 . Re d u c ed P u rc h a sing Po we r: I nf l at ion e ro d e s t h e p u rc hasi ng p o we r o f m o n ey ove r t i m e . As t h e ge n e ra l p r i c e

l eve l o f go o ds a n d s e r vi c e s r i s e s , e a c h u n i t o f c u r re n cy b u ys fewe r go o ds a n d s e r vi c e s .

2 . Im p a c t o n S av i n g s a n d Inve stm ents: I nf l at ion ca n d eva l u e s avi n gs a n d i nve stme nt s, i n c l u d ing ca s h , f i xe d

d e p o s it s, a n d b o n d s, a s t h e re a l ret u r n ( ret u r n af te r a d j ust ing fo r i nf l at i on) m ay b e l o we r o r eve n n e gati ve .

3 . Ef fe cts o n Fi xe d In co m e s : Pe o p l e o n f i xe d i n co m e s , l i ke ret i re e s l i vi n g o ff p e n s i o ns, ca n f i n d i t c h a l l e nging to

m a i ntai n t h ei r sta ndard o f l i vi n g d u r i ng i nf l ati onar y p e r i o d s.

4 . C o st o f B o rro w i n g : I nf l ati on ca n affe c t t h e co st o f b o r rowing , i m p a c ti ng b o t h i n d i vi d uals a n d b u s i n e ss e s.

L e n d e rs m ay i n c re a s e i nte re st rate s to co m p e n sate fo r t h e d i m i n is he d va l u e o f m o n ey d u e to i nf l ati on.

5. U n certainty a n d P l a nning C h a llen ges : I nf l ati on i nt ro duce s u n c er tai nty i n eco n o mi c p l a n ni ng a n d d ec i s i o n -

m a k i n g. B u s i n e ss e s m ay f i n d i t d i ff i c u l t to e st i m ate f u t u re co st s a n d s et p r i c e s , affe c t i ng p ro f i tabi l ity a n d
co m p et it ive ne ss .

54
GDP Deflator

I t i s t h e Ra t i o b e t ween G D P a t cu r r e nt p r i ce s a n d G D P a t co n s t a n t p r i ce s

I t i s a b e t ter m e a s u re o f p r i ce b e h av i o r a s i t cove r s a l l g o o d s a n d s e r vi ces p r o d u ce d i n

t h e co u n t r y

I f G D P d e f l a to r i s 1 , i t i m p l i e s n o ch a n g e i n g e n e ra l p r i ce l e ve l s

I f G D P d e f l a to r i s > 1 , i t i m p l i e s i n cr e a se i n g e n e ra l p r i ce l e vel s

I t i s br o a der th a n th e C PI a n d t h e WPI

C a l cu l a t e d u s i n g va r i e ty o f p r i m a r y p r i ce i n d i ce s

I t i s u s e d t o d e f l a te i n d i v i d u a l co m p o n e n t s o f t h e G D P va l u e d a t cu r r en t p r i ce s ( e i t h er
f r o m th e pr o du cti o n o r t h e d e ma n d s i d e e s t i mates) to o bta i n vo l u me e s ti ma tes
GDP DEFLATOR
UPSC-Pre-2011

E co n o m i c g r o w t h i s u s u a l l y co u p l e d w i t h ?

a . D e f l a t i on

b . In f l a ti o n

c. Stagflation

d . H y p e ri n f l a t i o n
2013

A rise in general level of prices may be caused by (UPSC -

Pre-2013)

1 . An increase in the money supply.

2 . A decrease in the aggregate level of output.

3. An increase in the effective demand.

Select the correct answer from the code given below

a) 1 only

b) 1 and 2 only

c) 2 and 3 only

d) 1, 2 and 3
 UPSC 2015

Which of the following brings out the

‘Consumer Price Index Number for Industrial
Workers’

a. Reserve bank of India

b. Department of Economic Affairs

c. The Labour Bureau

d. The Department of Personnel and Training.

 2011

A rapid increase in the rate of inf lation is sometimes attributed to the “base effect”.
What is “base effect ”?

(a.) It is the impact of drastic def iciency in supply due to failure of crops

(b.) It is the impact of the surge in demand due to rapid economic growth

(c.) It is the impact of the price levels of previous year on the calculati on of inf lation
rate

(d.)None of the statements (a), (b) and (c) ‘given above is correct in this context
 2013

Consider the following statements :

1. Inflation benefits the debtors.

2. Inflation benefits the bond -holders.

Which of the statements given above is /are correct?

a) 1 only

b) 2 only

c) Both 1 and 2

d) Neither 1 nor 2
 [UPSC-CDS-2012-I]

Which of the followi ng measures should be taken when an economy

is going throug h in inf lationar y pressures?

1. The direct taxes should be increased.

2. The interest rate should be reduced.

3. The public spending should be increased.

Select the correct answer from the code given below

(a) Only 1

(b) Only 2

(c) 2 and 3

(d) 1 and 2
 UPSC-CDS-2012-II

Which is an appropriate description of deflation?

( a ) i t i s a s u d d e n f a l l i n t h e va l u e o f a c u r r e nc y a g a i n s t o t h e r c u r r e nc i e s .

( b ) I t i s a p e r s i s t en t r e c e s s i o n i n t h e e c o n o m y.

( c ) I t i s a p e r s i s t en t f a l l i n t h e g e n e ra l p r i c e l e ve l o f g o o d s a n d s e r v i c es .

( d ) I t i s f a l l i n t h e ra t e o f i n f l a t i o n o ve r a p e r i o d o f t i m e