Page 103 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 9: Inflation: Nature and Extent

More recently, according to prediction made by some economists, the inflation rate in Yugoslavia Notes
was to reach 2,50,000 percent in December 1993 (TOI, 27/12/1993). The Yugoslav treasury had
issued the biggest currency notes with denomination of 500 billion dinars to facilitate
transactions.

In the modern world economy open inflation is a rare phenomenon. Countries facing
inflation have suppressed inflation. For example, the 7-8 percent inflation in India in
2008 was virtually a suppressed inflation.

(iv) Open and Suppressed Inflation
In the contemporary writings on the subject, one often comes across the terms ‘open inflation’
and ‘suppressed inflation.’ When there is no control on the rising prices and prices are free to
find their own level, the inflation under this condition is called open inflation. In the post-War
II period, control and regulation of prices by direct and indirect measures has become a common
feature of economic policy of most developed and developing economies. In addition to indirect
measures including monetory and fiscal control measures, direct price control measure in the
form of statutory fixation of the price or fixation of a price ceiling; rationing the consumption of
scarce goods, controlled distribution of goods through public distribution system; subsidization
of commodities with inflation potentials, etc. are used to control the price rise. In spite of these
control measures, prices do rise and inflation does take place but at a rate lower than the potential
rate in the open system. This kind of inflation is called suppressed inflation.
9.4 Inflation, Disinflation and Deflation

Before we proceed to discuss further aspects of inflation, let us understand the difference between
inflation and disinflation and between inflation and deflation. Inflation refers to a persistent increase in
the general price level. Disinflation means decline in the rate of inflation. Deflation means fall in the
general price level below the base-year level. The conceptual difference between these terms is
illustrated below with hypothertical price data.
As can be seen from the above table, when PIN rises from 100 in base-year 2000-01 to 110 in year
2001-02, it means there 10% inflation. When PIN decreases from 110 in year 2001-02 to 105 in year
2002-03, inflation rate on year-to-year basis has declined from 10% to 4.5% but still remains above
the base-year level. This is the situation of disinflation—the fall in the rate of inflation. When PIN
declines below the base-year PIN=100, this means deflation. Thus, deflation means that the general
price level has gone down below the base-year price level.
Measuring Inflation, Disinflation and Deflation
(Base year = 2000-01)

Year Price Index Number % Change in Price Nature of Price Change
(PIN) (Year-to-Year)

2000-01 100 – –
2001-02 110 10 Inflation (10%)
2002-03 105 4.5 Disinflation (5.5%)
2003-04 100 (-) 5.0 Disinflation (5.0%)
2004-05 100 0.0 Zero Rate of Inflation
2004-05 95 - 5.0 Deflation

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