Description
The PPT explaining what Inflation is all about. It talks about 3 types of inflation namely moderate, hyper and running and galloping.
Group 1
?
Rise in the general level of prices of goods and services in an economy Too much money chasing too few goods Continuous fall in value of money Distinction made in 3 categories
? Moderate Inflation ? Running and Galloping Inflation ? HyperInflation
? ? ?
?
Moderate Inflation
? Mild and tolerable form of inflation ? Occurs when prices are rising slowly ? Typical in most industrialized countries
? Sign of a buoyant economy implying generation of jobs,
output and growth ? Chakravarthi Report of RBI : 3-4 percent rise in prices tolerable ? Creeping Inflation: Up to 3% ? Walking Inflation : Over 10%
?
Running and Galloping Inflation
? ? ? ?
Movement of price accelerates rapidly Double digit inflation rate of 10-20% per annum More than that is galloping inflation Causes economic distortions and disturbances
?
Hyper Inflation
? ? ? ? ?
Severe price rise Over 1000 percent per year Most pathetic deterioration in people’s purchasing power Leads to breakdown of country’s monetary supply Austria, Germany, Poland, Russia witnessed it after World War I
?
Stagflation
? Slow economic growth and a relatively high unemployment ? ? ? ?
accompanied by rise in prices Can occur when economy faces an unfavourable supply shock e.g.: rise in oil prices Rise in prices and also making production less profitable Inappropriate macroeconomic policies Central bank promoting excessive money supply growth and government imposing regulation
?
India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.
Most developed countries use the Consumer Price Index (CPI) to calculate inflation.
?
? Shows the alteration of values of the
consumers' goods and services.
? Change of prices of food materials,
clothes can be obtained.
?
Gives the change of the selling prices of the produce who sell goods. The mean of all the changes over a year is usually been taken to compute the index.
?
• •
First published in 1902 WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. The Indian government has taken WPI as an indicator of the rate of inflation in the economy. In India, a total of 435 commodities data on price level is tracked through WPI It is also the price index which is available on a weekly basis.
• • •
•
CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.
•
•
CPI is a fixed quantity price index and considered by some, a cost of living index.
?
CPI is considered as the best method as it actually measures the price that a consumer will have to spend to buy the product. WPI does not properly measure the exact price rise at the consumer end.
?
?
More than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view. The last WPI series of commodities in 1993-94
?
6.00%
5.00%
4.00%
3.00% Inflation
2.00%
1.00%
Source :http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=1
0.00%
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
Source :http://inflationdata.com/inflation/images/charts/Articles/Decade_inflation_chart.htm
Source : http://inflationdata.com/Inflation/images/charts/Annual_Inflation/Cumulative_Inflation_by_Decade.jpg
250
200
150
100
50
0 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
300
250
200
1970-71 150
1981-82
1993-94
100
50
Source :http://www.rbi.org.in/Scripts/PublicationsView.aspx?id=9545
0 1 2 3 4 5 6 7 8 9 10 11 12 13
?The ten million dollar note introduced by the Reserve Bank of Zimbabwe ?Previously, the highest existing note, introduced last month, was for 750,000 Zimbabwe dollars. ?A hamburger at an ordinary cafe costs about 15 million Zimbabwe dollars (£3).
Price Inflation Has Immense Effect On The Time Value Of Money (TVM ) ? Inflation Exerts Impact On The Treasury Of A Nation As Well ? Inflation Reduces The Value Of Cash , Resulting In Proverbial “Shoe Leather Cost” ? Rising Inflation Can Prompt Trade Unions To Demand Higher Wages, To Keep Up With Consumer Prices. Rising Wages In Turn Can Help Fuel Inflation ? Inflation Increases “Menu Costs” As Changing Prices Are Costly To Firms ? The Most Immediate Effect Of Inflation Is The Decrease In The Purchasing Power Of Rupee And Its Depreciation
?
?
Inflation Thus Affects Investments Of A Country Inflation Changes The Allocation Of Income. This Exerts Maximum Effect On The Lenders Than The Borrowers At The Time Of Persisting Inflation, Because The Loans Sanctioned Previously Are Paid Back Later In The Form Of Inflated Rupees Inflation Adds Inefficiencies In The Market, And Makes It Difficult For Companies To Budget Or Plan Long-term
?
?
?
Inflation Can Impose Hidden Tax Increases, As Inflated Earnings Push Taxpayers Into Higher Income Tax Rates.
PHILLIPS CURVE
? ? ? ? ? ? ?
Inverse Relation Between Unemployment And Inflation When Inflation Is High , Unemployment Is Low Higher Wages When Unemployment Is Low Leads To Inflation Theory Criticized By Edmund Phelps & Milton Freidman Who Argued For The Effect On Real Wages Exception To This Is STAGFLATION , i.e. High Inflation Accompanied By High Unemployment Rate Explained Using Short And Long Term Phillips Curve (“Expectation –Augmented” Curve) NAIRU ( Non-accelerating Inflation Rate Of Unemployment) Or Natural Rate Of Unemployment -There Is Some Rate Of Unemployment That, If Maintained, Would Be Compatible With A Stable Rate Of Inflation
Monetary Causes
Inflation is a complex phenomenon which cannot be attributed to a single factor. Let us see all the factors that influence INFLATION
1.
Demand Pull : Inflation due to increase in demand because of increased
government and public spending.
2.
Cost Push (supply shock inflation ): Inflation caused by drops in
aggregate supply due to increased prices of inputs.
3.
Built-in inflation : Inflation due to internal factors e.g. workers increased wages
put on to consumers.
4.
Increases in money supply : increase in money supply increases demand for
products causing inflation.
1.
High Non-Development Expenditure : the growth of defence and
non-development expenditure
2.
Black Money :Some economists have condemned black money in the hands
of tax evaders and black marketers as an important source of inflation in a country. Black money encourages lavish spending, which causes excess demand and a rise in price.
3.
High Indirect Taxes: Incidence of high commodity taxation.Prices tend to
rise on account of high excise duties imposed by the Government on raw materials and essential goods.
1.
High Population Growth : The rising pressure of demand resulting from of population and money income, will cause a high price rise in such country. Natural Calamities : Natural calamities also contribute occasionally to the
inflationary boost in a country. Events such as cyclones and floods, which destroy village economies, also aggravate the inflationary pressure.
2.
3.
Corruption, High Import, Monopolies etc. also cause some influence on inflation
?
The Reserve Bank of India (RBI) follows a multiple indicator approach to arrive at its goals of growth, price stability and financial stability, rather than targeting inflation alone. The RBI has certain weapons which it wields every time and in all situations to counter any form of inflationary situation in the economy. These weapons are generally the mechanisms and the policies through which the Central Bank seeks to control the amount of credit flowing in the market. The steps generally taken by the RBI to tackle inflation include
? Rise in repo rates (the rates at which banks borrow from the RBI) ? Rise in Cash Reserve Ratio ? Reduction in rate of interest on cash deposited by banks with RBI.
? ?
?
?
The signals are intended to spur banks to raise lending rates and to reduce the amount of credit disbursed.
?
The Reserve Bank of India (Amendment) Act, 2006 gives discretion to the Reserve Bank to decide the percentage of scheduled banks' demand and time liabilities to be maintained as Cash Reserve Ratio (CRR) without any ceiling or floor. Consequent to the amendment, no interest will be paid on CRR balances so as to enhance the efficacy of the CRR, as payment of interest attenuates its effectiveness as an instrument of monetary policy.
?
?
The Reserve Bank lends cash to the banks at an interest rate determined by the Reserve Bank's Monetary Policy Committee. This interest rate is called the Reserve Bank's repurchase rate, or repo rate for short. Banks set their deposit interest rates somewhat below and their lending rates somewhat above the repo rate. Through the repo rate, the Reserve Bank indirectly has a strong influence on all the short-term interest rates in the banking system. If the Reserve Bank's analysis shows that inflation is going to be higher than the inflation target set by the government, it has to put a brake on the inflation process. This is done in the following way: • • • • • The Reserve Bank raises the repo rate. Banks then usually raise their lending and deposit rates. When people face higher lending rates, they buy fewer goods on credit. This causes less credit to be used and less money to end up with shopkeepers. With less money, credit and expenditure in the economy, it becomes more difficult to raise prices and wages. • Therefore, inflation is reduced.
?
?
The RBI also buys dollars from banks and exporters, partly to prevent the dollars from flooding the market and indirectly raising the rupee. This however increases liquidity. To combat this, RBI does "sterilization“; it sucks out the rupees it pays out for dollars through sale of sterilization bonds. It then sells these bonds to banks.
?
?
?
?
If the CRR and REPO rate are hiked frequently, the economy may take a U - turn, as most commercial banks religiously increase their lending rates, without actually studying the impact. These measures generally taken by the RBI do not effectively tackle inflation but on the other hand effectively stunts the growth pattern of the economy. Inflation is a consequence of increasing demand vis – a – vis the supply in the economy. The demand must be effectively curtailed or pushed down, which the present CRR policy, by reducing the credit flow and money flow in the economy, is not managing to do effectively.
There are two major drawbacks in the CRR – REPO policy adopted by the RBI to combat inflation.
1.
Monetary tools have proved more effective in economies with greater financial inclusion. They are less effective in economies such as India's, where the majority of the population still has no access to banks, and those with access barely have the resources to open bank accounts. In spite of its being an indirect weapon of credit control, CRR does impact the level of money supply in the economy and plays some role in the fight against inflation. But the impact of the CRR hike will not distinguish as between productive credit and credit meant for consumption. This will hurt growth and the creation of assets in the economy.
1.
? ? ?
96 million passengers Investments of $150bn by 2020 Projected growth $230mn by 2020
? ? ? ? ?
Cost of Aviation Turbine Fuel Increases Employees Remuneration rises Ground Networking Charges increase Increase in Cabin Crew Costs Costs of Refreshments Served increases
? ? ? ?
Increase price fares of the tickets Sack the employees Reduction of services provided Cost cutting measures
?
Economies desire for
? rapid economic growth ? Full employment ? Price stability
?
It is desirable to have low or moderate inflation rather than zero inflation
? ? ? ?
Failing Industries need to cut down wages to meet other demands In absence of Inflation, workers would not approve of reduction in wages Though it is possible to keep the wages flat for a year or two Hence, flat wages with Inflation of 3-4 % is equivalent to pay cut
? ?
?
Moderate Inflation leaves room for negative real interest rates to boost economic activity. If interest rates are 2% at a time when inflation is 4%, borrowers are essentially being paid to borrow money. Since interest rates can never go below 0% in nominal terms, this economic tool would not be possible in a world without inflation.
? Without
Inflation any price rise would be highly scrutinized ? Inflation allows firms with marginal pricing power to push through price increases ? This would not be questioned as price rise expected due to Inflation ? This leads to higher profits for firms and eventually higher wages and lower unemployment.
? Globalization
has helped to make the Inflation fluctuations less volatile ? Globalized nations follow the policies that achieve greater growth, higher income, and faster economic freedom and all this leads to lower rate of inflation ? Globalization helped many emerging market economies such as India and Latin America to stabilize their rate of inflation.
? Globalization
has increased outsourcing of work to developing countries such as India ? Due to foreign investments, the domestic companies had to reduce the price of their products and this also helped in reducing the rate of inflation ? Due to increase in cost of production in developing countries costs were increased ? This led to increase in Inflation ? Hence Globalisation and Inflation flow together
?
Presented by: Group 1
Shweta Jaiswal – 126 Roshan Alexander – 146 Manmeet Sabharwal – 148 Divij Saharia – 149 Madhav Sharma – 153 Ameya Shisani – 154 Pooja Mandalia – 168
doc_710650002.ppt
The PPT explaining what Inflation is all about. It talks about 3 types of inflation namely moderate, hyper and running and galloping.
Group 1
?
Rise in the general level of prices of goods and services in an economy Too much money chasing too few goods Continuous fall in value of money Distinction made in 3 categories
? Moderate Inflation ? Running and Galloping Inflation ? HyperInflation
? ? ?
?
Moderate Inflation
? Mild and tolerable form of inflation ? Occurs when prices are rising slowly ? Typical in most industrialized countries
? Sign of a buoyant economy implying generation of jobs,
output and growth ? Chakravarthi Report of RBI : 3-4 percent rise in prices tolerable ? Creeping Inflation: Up to 3% ? Walking Inflation : Over 10%
?
Running and Galloping Inflation
? ? ? ?
Movement of price accelerates rapidly Double digit inflation rate of 10-20% per annum More than that is galloping inflation Causes economic distortions and disturbances
?
Hyper Inflation
? ? ? ? ?
Severe price rise Over 1000 percent per year Most pathetic deterioration in people’s purchasing power Leads to breakdown of country’s monetary supply Austria, Germany, Poland, Russia witnessed it after World War I
?
Stagflation
? Slow economic growth and a relatively high unemployment ? ? ? ?
accompanied by rise in prices Can occur when economy faces an unfavourable supply shock e.g.: rise in oil prices Rise in prices and also making production less profitable Inappropriate macroeconomic policies Central bank promoting excessive money supply growth and government imposing regulation
?
India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.
Most developed countries use the Consumer Price Index (CPI) to calculate inflation.
?
? Shows the alteration of values of the
consumers' goods and services.
? Change of prices of food materials,
clothes can be obtained.
?
Gives the change of the selling prices of the produce who sell goods. The mean of all the changes over a year is usually been taken to compute the index.
?
• •
First published in 1902 WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. The Indian government has taken WPI as an indicator of the rate of inflation in the economy. In India, a total of 435 commodities data on price level is tracked through WPI It is also the price index which is available on a weekly basis.
• • •
•
CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.
•
•
CPI is a fixed quantity price index and considered by some, a cost of living index.
?
CPI is considered as the best method as it actually measures the price that a consumer will have to spend to buy the product. WPI does not properly measure the exact price rise at the consumer end.
?
?
More than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view. The last WPI series of commodities in 1993-94
?
6.00%
5.00%
4.00%
3.00% Inflation
2.00%
1.00%
Source :http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=1
0.00%
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
Source :http://inflationdata.com/inflation/images/charts/Articles/Decade_inflation_chart.htm
Source : http://inflationdata.com/Inflation/images/charts/Annual_Inflation/Cumulative_Inflation_by_Decade.jpg
250
200
150
100
50
0 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
300
250
200
1970-71 150
1981-82
1993-94
100
50
Source :http://www.rbi.org.in/Scripts/PublicationsView.aspx?id=9545
0 1 2 3 4 5 6 7 8 9 10 11 12 13
?The ten million dollar note introduced by the Reserve Bank of Zimbabwe ?Previously, the highest existing note, introduced last month, was for 750,000 Zimbabwe dollars. ?A hamburger at an ordinary cafe costs about 15 million Zimbabwe dollars (£3).
Price Inflation Has Immense Effect On The Time Value Of Money (TVM ) ? Inflation Exerts Impact On The Treasury Of A Nation As Well ? Inflation Reduces The Value Of Cash , Resulting In Proverbial “Shoe Leather Cost” ? Rising Inflation Can Prompt Trade Unions To Demand Higher Wages, To Keep Up With Consumer Prices. Rising Wages In Turn Can Help Fuel Inflation ? Inflation Increases “Menu Costs” As Changing Prices Are Costly To Firms ? The Most Immediate Effect Of Inflation Is The Decrease In The Purchasing Power Of Rupee And Its Depreciation
?
?
Inflation Thus Affects Investments Of A Country Inflation Changes The Allocation Of Income. This Exerts Maximum Effect On The Lenders Than The Borrowers At The Time Of Persisting Inflation, Because The Loans Sanctioned Previously Are Paid Back Later In The Form Of Inflated Rupees Inflation Adds Inefficiencies In The Market, And Makes It Difficult For Companies To Budget Or Plan Long-term
?
?
?
Inflation Can Impose Hidden Tax Increases, As Inflated Earnings Push Taxpayers Into Higher Income Tax Rates.
PHILLIPS CURVE
? ? ? ? ? ? ?
Inverse Relation Between Unemployment And Inflation When Inflation Is High , Unemployment Is Low Higher Wages When Unemployment Is Low Leads To Inflation Theory Criticized By Edmund Phelps & Milton Freidman Who Argued For The Effect On Real Wages Exception To This Is STAGFLATION , i.e. High Inflation Accompanied By High Unemployment Rate Explained Using Short And Long Term Phillips Curve (“Expectation –Augmented” Curve) NAIRU ( Non-accelerating Inflation Rate Of Unemployment) Or Natural Rate Of Unemployment -There Is Some Rate Of Unemployment That, If Maintained, Would Be Compatible With A Stable Rate Of Inflation
Monetary Causes
Inflation is a complex phenomenon which cannot be attributed to a single factor. Let us see all the factors that influence INFLATION
1.
Demand Pull : Inflation due to increase in demand because of increased
government and public spending.
2.
Cost Push (supply shock inflation ): Inflation caused by drops in
aggregate supply due to increased prices of inputs.
3.
Built-in inflation : Inflation due to internal factors e.g. workers increased wages
put on to consumers.
4.
Increases in money supply : increase in money supply increases demand for
products causing inflation.
1.
High Non-Development Expenditure : the growth of defence and
non-development expenditure
2.
Black Money :Some economists have condemned black money in the hands
of tax evaders and black marketers as an important source of inflation in a country. Black money encourages lavish spending, which causes excess demand and a rise in price.
3.
High Indirect Taxes: Incidence of high commodity taxation.Prices tend to
rise on account of high excise duties imposed by the Government on raw materials and essential goods.
1.
High Population Growth : The rising pressure of demand resulting from of population and money income, will cause a high price rise in such country. Natural Calamities : Natural calamities also contribute occasionally to the
inflationary boost in a country. Events such as cyclones and floods, which destroy village economies, also aggravate the inflationary pressure.
2.
3.
Corruption, High Import, Monopolies etc. also cause some influence on inflation
?
The Reserve Bank of India (RBI) follows a multiple indicator approach to arrive at its goals of growth, price stability and financial stability, rather than targeting inflation alone. The RBI has certain weapons which it wields every time and in all situations to counter any form of inflationary situation in the economy. These weapons are generally the mechanisms and the policies through which the Central Bank seeks to control the amount of credit flowing in the market. The steps generally taken by the RBI to tackle inflation include
? Rise in repo rates (the rates at which banks borrow from the RBI) ? Rise in Cash Reserve Ratio ? Reduction in rate of interest on cash deposited by banks with RBI.
? ?
?
?
The signals are intended to spur banks to raise lending rates and to reduce the amount of credit disbursed.
?
The Reserve Bank of India (Amendment) Act, 2006 gives discretion to the Reserve Bank to decide the percentage of scheduled banks' demand and time liabilities to be maintained as Cash Reserve Ratio (CRR) without any ceiling or floor. Consequent to the amendment, no interest will be paid on CRR balances so as to enhance the efficacy of the CRR, as payment of interest attenuates its effectiveness as an instrument of monetary policy.
?
?
The Reserve Bank lends cash to the banks at an interest rate determined by the Reserve Bank's Monetary Policy Committee. This interest rate is called the Reserve Bank's repurchase rate, or repo rate for short. Banks set their deposit interest rates somewhat below and their lending rates somewhat above the repo rate. Through the repo rate, the Reserve Bank indirectly has a strong influence on all the short-term interest rates in the banking system. If the Reserve Bank's analysis shows that inflation is going to be higher than the inflation target set by the government, it has to put a brake on the inflation process. This is done in the following way: • • • • • The Reserve Bank raises the repo rate. Banks then usually raise their lending and deposit rates. When people face higher lending rates, they buy fewer goods on credit. This causes less credit to be used and less money to end up with shopkeepers. With less money, credit and expenditure in the economy, it becomes more difficult to raise prices and wages. • Therefore, inflation is reduced.
?
?
The RBI also buys dollars from banks and exporters, partly to prevent the dollars from flooding the market and indirectly raising the rupee. This however increases liquidity. To combat this, RBI does "sterilization“; it sucks out the rupees it pays out for dollars through sale of sterilization bonds. It then sells these bonds to banks.
?
?
?
?
If the CRR and REPO rate are hiked frequently, the economy may take a U - turn, as most commercial banks religiously increase their lending rates, without actually studying the impact. These measures generally taken by the RBI do not effectively tackle inflation but on the other hand effectively stunts the growth pattern of the economy. Inflation is a consequence of increasing demand vis – a – vis the supply in the economy. The demand must be effectively curtailed or pushed down, which the present CRR policy, by reducing the credit flow and money flow in the economy, is not managing to do effectively.
There are two major drawbacks in the CRR – REPO policy adopted by the RBI to combat inflation.
1.
Monetary tools have proved more effective in economies with greater financial inclusion. They are less effective in economies such as India's, where the majority of the population still has no access to banks, and those with access barely have the resources to open bank accounts. In spite of its being an indirect weapon of credit control, CRR does impact the level of money supply in the economy and plays some role in the fight against inflation. But the impact of the CRR hike will not distinguish as between productive credit and credit meant for consumption. This will hurt growth and the creation of assets in the economy.
1.
? ? ?
96 million passengers Investments of $150bn by 2020 Projected growth $230mn by 2020
? ? ? ? ?
Cost of Aviation Turbine Fuel Increases Employees Remuneration rises Ground Networking Charges increase Increase in Cabin Crew Costs Costs of Refreshments Served increases
? ? ? ?
Increase price fares of the tickets Sack the employees Reduction of services provided Cost cutting measures
?
Economies desire for
? rapid economic growth ? Full employment ? Price stability
?
It is desirable to have low or moderate inflation rather than zero inflation
? ? ? ?
Failing Industries need to cut down wages to meet other demands In absence of Inflation, workers would not approve of reduction in wages Though it is possible to keep the wages flat for a year or two Hence, flat wages with Inflation of 3-4 % is equivalent to pay cut
? ?
?
Moderate Inflation leaves room for negative real interest rates to boost economic activity. If interest rates are 2% at a time when inflation is 4%, borrowers are essentially being paid to borrow money. Since interest rates can never go below 0% in nominal terms, this economic tool would not be possible in a world without inflation.
? Without
Inflation any price rise would be highly scrutinized ? Inflation allows firms with marginal pricing power to push through price increases ? This would not be questioned as price rise expected due to Inflation ? This leads to higher profits for firms and eventually higher wages and lower unemployment.
? Globalization
has helped to make the Inflation fluctuations less volatile ? Globalized nations follow the policies that achieve greater growth, higher income, and faster economic freedom and all this leads to lower rate of inflation ? Globalization helped many emerging market economies such as India and Latin America to stabilize their rate of inflation.
? Globalization
has increased outsourcing of work to developing countries such as India ? Due to foreign investments, the domestic companies had to reduce the price of their products and this also helped in reducing the rate of inflation ? Due to increase in cost of production in developing countries costs were increased ? This led to increase in Inflation ? Hence Globalisation and Inflation flow together
?
Presented by: Group 1
Shweta Jaiswal – 126 Roshan Alexander – 146 Manmeet Sabharwal – 148 Divij Saharia – 149 Madhav Sharma – 153 Ameya Shisani – 154 Pooja Mandalia – 168
doc_710650002.ppt