Demand pull Inflation: A countries economic growth is coupled with inflation due to rise in aggregate demand that will lead to increase in price levels.
Cost push Inflation: Is experienced when non availability of a commodity leads to increase in price levels as in case of oil shock that the world has experienced during 1970’s. It is also called supply shock inflation which will generally lead to recession and stagflation.
Core inflation: It is a measure of inflation that excludes items that face volatile price movement, notably food and energy. it is non-food manufacturing product inflation also called Underlying inflation.It is a preferred tool for framing long term policy.
Built in inflation: Increase in price of wages of workers that are carried on to the input costs of a product which are borne by the consumers leading to the vicious cycle of price rise called built in inflation.
Measuring inflation: Inflation is measured under two indices 1) WPI 2) CPI
WPI - Inflation: In WPI food items get lower weightage and manufacturing goods have higher weightag. WPI is the weight price index of basket of goods consisting of 676 commodities. WPI is available on weekly basis. As per IMF only 24 countries use WPI.
Primary articles -102 commodities - weightage (22.03)
Fuel, power,light and lubricants -19 commodities – weightage (14.23)
Manufactured products -555 commodities – weightage (63.75)
CPI – Inflation: The four variants of CPI index are.CPI is measured bimonthly. As per IMF 157 countries use CPI.
CPI -IW: Basket of 370 commodities –weightage(60)
CPI – UNME: Basket of 180 commodities –weightage(47)
CPI – AL: Basket of 60 commodities – weightage (72)
CPI – RL: Basket of 60 commodities – weightage (70)
IW: Industrial workers
UNME: Urban non manual employee
AL: Agriculture laborers
RL: Rural laborers
GDP Deflator: Nominal GDP (current prices)/Real GDP (constant prices). It is the measure of level of prices of all new, domestically produced goods and services in an economy. It tells us the rise in nominal GDP that is attributed to rise in prices rather than a rise in quantities produced. It doesn’t depend on fixed basket of goods but covers entire range of economic activities. It is calculated quarterly with a lag of two months since 1996. If the GDP deflator value is 300 means that the current- year price is 3 times the base year.
Forms of Inflation:
Creeping Inflation (1-5), Trotting Inflation (5-10), Galloping inflation (10-20)……..→Runaway inflation, Hyper inflation……→Zimbflation
Stagflation: Inflation+ unemployment
Cycle of Inflation:
Fall in saving
↓
Fall in capital formation
↓
Fall in investment
↓
Fall in production
↓
Increase in demand
↓
Inflation
↓
Fall of rupee value
↓
Increase of govt.expenditure
↓
Increase of subsidies
↓
Increase in cost of production
↓
Fall of exports
.
