Inflation means a rise in prices of goods and services in an economy over a period of time. Inflation is caused by some demand-side factors (Increase in the money supply, Increase in income, Black money spending, Expansion of the Private Sector, Increasing Public Expenditures) and some Supply side factors (Shortage of factors of production, Industrial Disputes, Increase in exports (excess exports), Global factors, Neglecting the production of consumer goods).
The Nobel laureate’s analogy may be apt to India. After 12 rate hikes since March 2010, many are calling for the pause. However, with inflation at more than 8% for over 18 months, the longest since reforms began two decades ago. It may be time to worry about hangover. Those call for a pause in the rate hike are from the ones who benefit from inflation, conveniently for getting that if inflation persists any longer, the very growth that they are enjoying will vanish.
Causes of Inflation:
When the price pressures began to build, it was blamed on poor monsoon rains that led to lower output. Inflation due to rising crude oil prices was also one of the causes. After many months of denial, it is accepted that the pressures are now broad based, which left without tough measures could run out of control.
The inflationary spiral had begun, and the potential disturbance to economic climate is visible with rising labour strife, demand for higher salary. Most importantly, the pace of an increase in wages in rural and urban areas has also been much more than the inflationary expectation in the recent year. Monetary actions are beginning to have an impact. However, for it to have the desired effect, the fiscal side needs to a co-ordinate, which seems to be absent. The government requires conducting its finances prudently helping the monetary authorities. The synchronization between fiscal policy and monetary policy is not up to the required level. Government continues with its fiscal expansionary policy, such as subsidies on petroleum products, fertilizers and doling out funds by the name of the employment schemes. It has already said it would borrow Rs. 53,000 crore more than it had budgeted in February. Due to excess of expenditure in fiscal policy, the impact of monetary policy suffered. Another reason is inflation can happen when governments print an excess of money to deal with a crisis. When any extra money is created, it will increase some societal group’s buying power. All sectors in the economy try to buy more than the economy can produce. Shortages are then created, and merchants lose business. In the end, the price-level rises.
Impact on the economy::
Inflation affects the different sectors of the economy (Effects on the distribution of income and wealth, Effects on production, Effects on the Government, Effects on the Balance of Payment, Effects on Monetary Policy, Effects on Social Sector, Effects on Political environment) and different classes of the people (Debtors & Creditors, Salaried Class, Wages earners, Fixed income group, Investors and shareholders, Businessmen, Agriculturists).
The common reason of inflation is a rise in production costs, which leads to an increase in the price of the final product. For example, if raw materials increase in price, this leads to the cost of production increasing, this in turn leads to the company increasing prices to maintain their profits. Due to higher-cost consumer, purchasing power gets decline, which cost fluctuation in demand and supply part.
Consequences
Inflation always hurts ones' standard of living. Rising prices mean people have to pay more for the same goods and services. Provided that income increases at a slower rate as inflation, the standard of living declines even if one makes more. So it is the root cause in making and affecting economy and people of the country poor.
Recently, On October 26, 2011 RBI hiked rates again to control the inflation. RBI has increased the repo and reverse repo rate by 25 basis point (. 25%%) to control the inflation. Simultaneously, to encourage the saving of the common man RBI has deregulated the saving bank deposit rates.
Conclusion:
The government is taking many measure to lower down the rate of inflation i.e. rising of the repo and reverse repo rate, enhancing the role of monetary policy but for it is said that for the growth of the country inflation is necessary but excess of inflation can cause crises.
Written by : Rohit Dheer
( BIMTECH)
( BIMTECH)
