Page 99 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 9: Inflation: Nature and Extent

According to Coulborn, inflation is a situation of “too much money chasing too few goods.” According Notes
to Kemmerer, “Inflation is ... too much currency in relation to physical volume of business.” Crowther
defined inflation as, “a state in which the value of money is falling, that is, prices are rising.” The
general drawback of these definitions is that they tell the cause of inflation rather than telling what
inflation is. The definitions of this orientation do not capture the full implications of the inflationary
situation. Besides, despite being theoretically unsound, these definitions are alleged to be of little use
in the formulation of anti-inflation policies, especially under modern economic conditions
characterized by complexity of factors causing inflation.

“Inflation exists when money income is expanding more than in proportion
to increase in earning activity.”

Consider some recent and more appropriate definitions of inflation. According to Ackley, “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.” According to Samuelson, “Inflation denotes a rise in the
general level of prices”. Bronfenbrenner and Holzman have suggested a number of alternative
definitions of inflation which are mostly modified versions of the earlier definitions. Their alternative
definitions make things more fuzzy rather than adding clarity to the concept of inflation.
What Rate of Price Rise is Inflation?
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’. Though the
terms ‘persistent’, ‘prolonged’ and ‘sustained’ are not defined precisely, it implies that if price rise is
not ‘persistent’, prolonged or sustained, it is not inflation whatever the rate of rise in the general price
level. Nor do the economists specify what rate of price rise is ‘considerable’ or’ appreciable’ - 1%, 5%,
10%, 20% or what ? They do not provide a specific answer to this question too. It may thus be concluded
that modern economists do not provide a definite answer to the question as to ‘what rate of increase
in price rise is inflation’.
However, if one goes by Samuelson-Nordhaus definition of inflation, ‘a rise in the general level of
prices’ is inflation. It means that any rise in the general price level over and above the baseyear level
is inflation. This is the concept of inflation which is generally used in the analysis of price behaviour.
For instance, the rate of price rise in India during April-May 2009 was below 1% and had gone down
to 0.13% in the last week of May 2009 - the lowest in 30 years. This almost zero rate of rise in the
general price was called inflation in public report. This is the practice, in fact, in all other countries
and adopted also by the international organizations like World Bank and IMF.
Now a question arises here : What is the desirable rate of inflation ? The economists’ point of view on
this question is discussed below.
What is Desirable Rate of Inflation?
The question as to what is a desirable rate of inflation can be answered by linking it to the economic
and social needs of the country. In general, a moderate rate of inflation is considered to be desirable
and acceptable for at least three reasons.
(i) A moderate rate of inflation keeps the economic outlook optimistic, promotes economic activity
and prevents economic stagnation.
(ii) It is helpful in the mobilization of resources by increasing the overall rate of savings and
investment—inflationary financing has, in fact, been widely used to finance economic growth
of the underdeveloped countries.

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