INFLATION

INFLATION

• Inflation is a quantitative of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.
• It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods.
• Often expressed as a percentage, inflation indicates a decrease in the individual viewpoint.
• Those with tangible assets, like property or stocked commodities, may like  to see some inflation as that raises the value of their assets.
• People holding cash may not like inflation, as it erodes the value of their cash holdings.
• Ideally, an optimum level of inflation is required to promote  spending to a certain extent instead of saving, thereby nurturing economic growth.

Understanding Inflation

• As prices rise, a single unit of currency loses value as it buys fewer goods and services.  This loss of purchasing power impacts the general cost of living for the common public which ultimately leads to a deceleration in economic growth.  The consensus view among economists is that sustained inflation occurs when a nation's money supply growth outpaces economic growth.
• To combat this a country's appropriate monetary authority, like the central bank, then takes the necessary measures to keep inflation within permissible limits and keep the economy running smoothly.
• Inflation is measured in a variety of ways depending upon the types of goods and service considered and is the opposite of deflation which indicates a general decline occurring in prices for goods and services when the inflation rate falls below 0%.

Causes of Inflation

• Rising prices are the root of inflation, though this can be attributed to different factors, In the context of causes, inflation is classified into three types: Demand-pull inflation, Cost-Push inflation, and Built-In inflation.

Demand Pull factors:

These are those set of factors due to which there may be an increase in the demand for goods and services in the economy.  Increase in government expenditure:

• Increased government expenditure results in increased demand for goods and services and consequent increase in prices.  This is because increased government expenditure results in putting large money in the hands of public, thereby putting to affect too much money chasing too few goods.
  
• Rising population: Increasing population also acts as an important factor in pushing up prices because of increased demand especially when the supply is unable to meet the demand.
• Block Money: A large part of the black money is used in buying and selling of real estate in urban areas, extensive hoarding and black marketing in essential wage goods, such as cereals, pulses, etc. Black money, therefore, fuels demands and leads to rise in prices.
• Changing consumption patterns: Reserve Bank of India(RBI) put forward the theory that the inflation problem in India has its roots in a sharp increase in demand for certain food items that people eat more frequently as incomes rise.  One example is protein-rich food.  Increased consumption of pulses, eggs, fish and poultry were apparently driving up their prices in the economy.

Cost-Push Factors:

The reasons are:

• At times rise in wages, if greater than rise in productivity, increases the costs therefore increasing the prices too.
• Increase in indirect taxes also leads to cost side inflation.  Taxes such as custom and excise duty rates the cost of production as these taxes are levied on commodities.
• Increase in administered prices such as the MSP (Minimum Support Price) for the food grains, petroleum products etc. also leads to inflation as they have a huge share in budget of common citizens.
• Infrastructural bottlenecks such as the lack of proper roads, electricity, water, etc. rise per unit cost of production,  This is one of the prime reasons for inflation in the context of Indian economy.
• Owing to events such as failed monsoons there is a drop in agricultural productivity, which inevitably results in inflation at times.

THANKS FOR WATCH & READ

https://generalupsc.blogspot.com/