Inflation : types of inflation and their remedies.pptx

Inflation

1. Types of inflation Presented by Govinda borah ( pg 2 nd sem )

2. Introduction Inflation refers to the general increase in prices of goods and services over time, resulting in a decrease in the purchasing power of money. It is measured by the rate of change in the Consumer Price Index (CPI) or the Producer Price Index (PPI). Inflation can be caused by various factors including increased consumer demand, rising production costs, expansionary monetary policies, or supply chain disruptions. Moderate inflation is typically considered normal for a growing economy, but high or unpredictable inflation can erode savings, reduce consumer spending power, and create economic instability. Central banks often use monetary policy tools, such as adjusting interest rates, to manage inflation levels and maintain price stability.

3. Objectives The objectives of this paper are as follows 1. To understand different types of inflation. 2. To understand the methods of inflation control.

4. Methodology This paper is purely based on secondary data. For the study of this paper, we have collected some books on macroeconomics and introductory monetary economics from the central library of our university. In addition internet sources have been used which is important for our study.

5. Types of inflation Creeping inflation: Creeping inflation, also known as mild or moderate inflation, refers to a gradual and steady increase in the general price level of goods and services over time. Unlike hyperinflation or even high inflation rates, creeping inflation involves relatively low and manageable increases in prices, typically ranging from around 1% to 3% annually. Walking inflation: Walking inflation is a term used to describe a moderate or intermediate level of inflation that is higher than creeping inflation but lower than high inflation. It refers to a situation where prices are rising at a noticeable rate but not rapidly enough to cause severe economic instability or hyperinflationary conditions. It hovers around 3% to 10%. Running or high inflation: Running inflation refers to a persistent but relatively moderate increase in the general price level of goods and services over time. Unlike galloping inflation, which is rapid and uncontrollable, running inflation is characterized by a gradual erosion of purchasing power and a steady rise in consumer prices. It typically hovers around 10-20%.

6. 4. Hyper inflation: Hyperinflation is an extreme and rapid form of inflation where prices skyrocket uncontrollably, leading to a collapse in the value of a currency. This phenomenon is characterized by extremely high inflation rates, often exceeding 50% per month, causing severe disruptions to economic stability and everyday life. Economists generally reserve the term “hyperinflation” to describe episodes when the monthly inflation rate is greater than 50 percent. For e.g prices in Zimbabwe nearly doubled every day – goods and services would cost twice as much each following day. With the unemployment rate exceeding 70%, economic activities in Zimbabwe virtually shut down and turned the domestic economy into a barter economy.

7. Methods of inflation prevention 1. Monetary Policy: Interest Rate Targeting: Central banks adjust interest rates (like the federal funds rate in the US) to influence borrowing and spending. Increasing rates can reduce inflation by making borrowing more expensive, thereby slowing down economic activity. Open Market Operations: Central banks buy or sell government securities to adjust the money supply. Selling securities reduces money in circulation, curbing inflation. Reserve Requirements: Changing the amount of cash banks must hold as reserves affects their ability to lend. Increasing reserve requirements can reduce lending and money supply growth, helping control inflation.

8. 2. Fiscal Policy: Taxation: Adjusting tax rates can influence consumer spending. Higher taxes may reduce disposable income and thus spending, helping to cool down demand-pull inflation. Government Spending: Managing government expenditure to avoid overheating the economy can also be a tool. Reduced spending or targeted investment can moderate inflationary pressures.

9. 3. Exchange Rate Policy: Exchange Rate Intervention: If inflation is driven by imported inflation (due to a weak domestic currency), central banks may intervene in foreign exchange markets to stabilize the currency’s value. 4. Regulatory Measures: Antitrust Policies: Preventing monopolistic pricing can keep prices competitive and prevent inflation due to market power. Consumer Protection Laws: Ensuring fair trade practices and preventing price gouging can also contribute to inflation control.

10. Conclusion In conclusion, inflation is a complex economic phenomenon with significant implications for consumers, businesses, and policymakers alike. While moderate inflation can be indicative of a healthy economy, high or volatile inflation can erode purchasing power and disrupt financial stability. Effective management of inflation requires a balanced approach, considering both monetary and fiscal policies, to ensure sustainable economic growth and stability over the long term.

11. Thank you!