Page 109 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 9: Inflation: Nature and Extent

(vii) Given that the consumer price index for each of three years is: Notes
Year 1 = CPI = 100 Year 2 = CPI = 180 Year 3 = CPI = 198
The inflation rate for year 2 is:
(a) 180% (b) 80% (c) 40%
(d) there is no inflation because deflation has occured.
(e) cannot be calculated with the given information
9.7 Summary

• In a broad sense of the term, inflation means a considerable and persistent rise in the general
price level over a period of time. However, there is no universally acceptable definition of
inflation. The definition of inflation has been, in fact, a matter of opinion on price rise and its
causes.
• “Inflation is a persistent and appreciable rise in the general level or average of prices.” Harry G.
Johnson defines inflation as “a sustained rise in prices.”
• If one goes by the definition of inflation given by some modern economists, any rise in the
general price level is not inflation. In their opinion, only a ‘persistent’, ‘prolonged’ and ‘sustained’
and a ‘considerable’ and ‘appreciable’ rise in the general price level can be called ‘inflation’.
• There are two common methods of measuring inflation : (i) percentage change in Price Index
Numbers (PIN), and (ii) change in GNP Deflator.
• Inflation is generally classified on the basis of its rate and causes. While rate-based classification
of inflation refers to the severity of inflation or how high or low is the rate of inflation, cause-
based classification of inflation refers to the factors that cause inflation.
• 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.
• Looking at the Indian data, the weekly rate of inflation (based on WPI) had shot up to 13.1% in
the 2 week of August 2008 - the highest rate of inflation during the past 16 years - and the
nd
annual inflation rate had gone up to 12.81% in 2008.
• The economic effects of inflation are all pervasive. It affects all those who depend on the market
for their livelihood. The effects of inflation may be favourable or unfavourable, and low or high
depending on the rate of inflation.
• The effect of inflation on income distribution depends on how it affects the price received and
price paid by different sections of the society, especially the consumers and the producers.
Prices received are the same as incomes defined crudely.
• As noted above, the overall impact of inflation is unpredictable. However, inflation has certain
definite and predictable effect on the income of certain sections of society.
• The government is a net gainer during the period of inflation. In order to analyze the
government’s gain from inflation, let us consider the government as a taxing and spending unit
and as a net borrower. As regards the effects of inflation on tax revenue, inflation increases revenue
yields from both, the direct and indirect taxes. Consider first the direct taxes, viz., personal and
corporate income taxes.
• Economic growth and employment go hand in hand. It may thus be construed that inflation
has promotional effect on employment. It is a widely accepted view that a moderate rate of
inflation helps economic growth which creates additional employment opportunities.
9.8 Key-Words

1. Hyperinflation : It is the most extreme inflation phenomenon, with yearly price increases
of three-digits percentage points and an explosive acceleration.

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