INFLATION , Economics for engineers

INFLATION

Inflation is not a state of high level price but a process of "continuous" rise in the general (overall0level of prices. So, inflation is a state in which the value of money is falling i.e, price price are rising.

Inflation is the rate  of  increase in the average level of price of goods and services over a specified period of time.

A continuous rise in the prices of goods and services in the economy that results in the fall in purchasing power of a counting called inflation.

CAUSES OF INFLATION            

      There are different reasons for which inflation may arise which are discussed below :- 

• Demand pull inflation  :- at full employment level may gets lots of money to purchase goods and services. So in all sectors demand for goods and services rise than the  supply of that goods and services. As demand increases the price of goods and services also increases. 

• Cost push inflation :- sometimes due to increase in the price of goods an services the labor group of a country may force to the employer to raise their wages. when the wages and salary increased cost of production will increase and to get the same profit as before the firm compel  to increase at the price level of goods and services which result inflation in the country.

• Excessive  monetary growth :-  Due to  creation of money the purchasing power of a group of people will increase. When this money is spent there will be a demand pull effect which gears up prices.

• Deficit of the federal government :-  If the federal government  system injects more money in the economy int the form of currency notes to maintain the decreasing interest rate the federal deficit  may cause to inflation.

EFFECT OF INFLATION 

The effect of inflation above a predefined level has a far reaching effect on the economy of any country . peoples have to take burden pf increased price of goods and services. Industrial sector faced in slow down in their production which leads slow in their production which leads slow economic growth and poor GDP. Effect of  inflation are :-

• Decreased purchasing power :- Due to inflation price of goods and services  increased so purchasing power of money decreased because they will have to pay more money to purchase the same thing that they have  purchased before inflation.

• Increase in bank rate :- As a measure to curve inflation , RBI increase the interest rate , so Borrowing cost will be higher for both consumers and corporate. Thus people buy less and recession will be taken place  in industrial sector and there will be a slow down in industry.

• Slow down in the economy :- Due to inflation and higher interest rate there will be a slow down in the industries which result high unemployment because companies will try to reduce their cost by firing or give VRS (voluntary retirement scheme ).

• Demand for higher wages :- inflation force the companies to increases the wages and salaries of their employees to compensate the increase in price of commodities .

• Effect of the productivity of companies 

TYPES OF HEADING 

Types of inflation are as follows :-

• Coverage or scope 

1. comprehensive or economy wide inflation
2. sporadic inflation

• Time or period of occurrence 

1. war time inflation 
2. postwar inflation
3. peace time inflation

• Government reaction or control

1. Open inflation
2. Suppressed or repressed inflation 

• Rising price or rate of inflation

1. Creeping , mild or low inflation
2. Chronic or secular inflation
3. Walking inflation
4. Moderate inflation
5. Running inflation 
6. Galloping or jumping inflation
7. Hyperinflation

• Different causes 

1. Deficit inflation
2. Credit inflation
3. scarcity inflation
4. profit inflation
5. pricing power , administrated price or Oligopolistic inflation
6. Tax inflation 
7. wage inflation
8. build in inflation
9. Development inflation
10. Fiscal inflation
11. Population inflation
12. Foreign trade induced inflation
13. Export boom inflation
14. Import price hike inflation
15. Export boom
16. Sectoral inflation
17. demand pull or excess demand inflation
18. cost push (supply side) inflation

• Expectation of predictability 

1. Anticipated or expected inflation
2. Unanticipated or unexpected inflation

I.  SCOPE

• Comprehensive  inflation :- When prices of all commodities rise in the entire economy , it is known as comprehensive inflation (Economy wide inflation).
• Sporadic inflation :- When price of only a few commodities in some regions (areas) rise, it is called sporadic inflation. Example :- increase in food price due to bad monsoon

II. TIME

• War time inflation :- It takes place during a war like situation when scant productive resources are all diverted and prioritized to produce military goods and equipments .It creates an extreme shortage of raw materials to people and soon fail to cope up with the market demand. As a  result , price of goods keeps on rising in the market and creates a wartime inflation.
• Post war inflation :- It takes place soon after a war or post war. After the war ,govt controls are relaxed resulting in a faster hike in prices then what experienced during the war.
• Peace time inflation :- When the price rise during the peace period or during the normal no war time , it is known as peace time. Government expenditure or spending or capital projects of a long development time.

III. GOVERNMENT CONTROL

• Open inflation :- When government doesn't attempt to restrict inflation , it is knowns as an open inflation .In a free market economy where prices are allowed to take its course open inflation occurs.
• Suppressed inflation :- When Government prevent the price rise through the price control , rationing etc. it is known as suppressed inflation. 

IV RATIO OF INFLATION

• Creeping inflation :- When price are gently rising , when price rise by not more than (up to) 3%  p.a. is is called creeping inflation.
• Chronic inflation :- If creeping inflation persist (continuous to increase) for a longer period , it is called chronic inflation.
• Walking inflation :- When the ratio of rising price is more than creeping or when price rise by more than 3% but less than 10% p.a. , it is called walking inflation.
• Moderate inflation:- In this inflation the concept of creeping and walking inflation clubbed together when price rise by les than 10% p.a. , it is called a stable or moderate inflation.
• Galloping inflation :-  If price rise by dual or triple digit like 30% or 40% or 999% yearly then it is now termed as galloping inflation . when price rise more than 20%but less than 1000% p.a. 
• Running inflation :- A rapid acceleration in the rate of  rising prices , when price rise by 10% to 20% p.a. called running inflation.
• Hyper inflation :- It is a situation where the price rise at an alternating high rate ; where price rise is above 1000% p.a. called hyper inflation. During this inflation national currency reduced almost to 0 and people start trading either by gold or silver.

V. EXPECTATION

• Anticipated inflation :- If the rate of inflation corresponds to what the majority of people are either expecting or predicting , is called anticipated inflation.
• Unanticipated inflation :- If the rate of inflation corresponds to what the majority of people are neither anticipating nor predicting is called unanticipated inflation.