Inflation 4

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1.1 Introduction

In economics, inflation is a rise in the general level of prices of goods and services in an

economy over a period of time. When the price level rises, each unit of currency buys fewer

goods and services; consequently, inflation is also erosion in the purchasing power of money a

loss of real value in the internal medium of exchange and unit of ac in the economy. A chief

measure of price inflation is the inflation rate, the annualized percentage change in a general

price index (normally the Consumer Price Index) over time.

Inflation can have many effects that can simultaneously have positive and negative effects on an

economy. Negative effects of inflation include a decrease in the real value of money and other

monetary items over time; uncertainty about future inflation may discourage investment and

saving, or may lead to reductions in investment of productive capital and increase savings in

non-producing assets. e.g. selling stocks and buying gold. This can reduce overall economic

productivity rates, as the capital required to retool companies becomes more expensive. High

inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices

will increase in the future. Positive effects include a mitigation of economic recessions, and debt

relief by reducing the real level of debt.

Economists generally agree that high rates of inflation and hyperinflation are caused by an

excessive growth of the money supply. Views on which factors determine low to moderate rates

of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in realdemand for goods and services, or changes in available supplies such as during scarcities, as well

as to growth in the money supply. However, the consensus view is that a long sustained period of

inflation is caused by money supply growing faster than the rate of economic growth.

Today, most mainstream economists favor a low steady rate of inflation. Low (as opposed to

zero or negative) inflation may reduce the severity of economic recessions by enabling the labor

market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents

monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and

stable is usually given to monetary authorities. Generally, these monetary authorities are the

central banks that control the size of the money supply through the setting of interest rates,

through open market operations and through the setting of banking reserve requirements.

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1.2 History of Inflation

Inflation originally referred to increases in the amount of money in circulation. For instance,

when gold was used as currency, the government could collect gold coins, melt them down, mix

them with other metals such as silver, copper or lead, and reissue them at the same nominal

value. By diluting the gold with other metals, the government could issue more coins without

also needing to increase the amount of gold used to make them. When the cost of each coin is

lowered in this way, the government profits from an increase in seignior age. This practice would

increase the money supply but at the same time the relative value of each coin would be lowered.

As the relative value of the coins becomes less, consumers would need to give more coins in

exchange for the same goods and services as before. These goods and services would experience

a price increase as the value of each coin is reduced.

From second half of the 15th century to the first half of the 17th, Western Europe experienced a

major inflationary cycle referred to as "price revolution", with prices on average rising perhaps

six fold over 150 years. It was thought that this was caused by the increase in wealth of

Habsburg Spain, with a large influx of gold and silver from the New World. The spent silver,

suddenly spread throughout a previously cash starved Europe, caused widespread inflation.

Demographic factors also contributed to upward pressure on prices, with European population

growth after depopulation caused by the Black Death pandemic.

By the 19th century, economists categorized three separate factors that cause a rise or fall in theprice of goods: a change in the value or resource costs of the good, a change in the price of

money which then was usually a fluctuation in the commodity price of the metallic content in the

currency, and currency depreciation resulting from an increased supply of currency relative to

the quantity of redeemable metal backing the currency. Following the proliferation of private

bank note currency printed during the American Civil War, the term "inflation" started to appear

as a direct reference to the currency depreciation that occurred as the quantity of redeemable

bank notes outstripped the quantity of metal available for their redemption. The term inflation

then referred to the devaluation of the currency, and not to a rise in the price of goods. This

relationship between the over-supply of bank notes and a resulting depreciation in their value

was noted by earlier classical economists such as David Hume and David Ricardo, who would

go on to examine and debate to what effect a currency devaluation (later termed monetary

inflation) has on the price of goods (later termed price inflation, and eventually just inflation).

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1.3 Inflation in India

India has been a cynosure for the past few years in the global economic scenario owing to its

varying inflation patterns. In the fiscal year 2004-05 and 2007-2008, India experienced an

average growth rate of more than 9%. However the global crunch pinched the economy so badly

that the economy gave in to the adverse external shocks and some sectors experienced a slump.

Inflation in India 2009 meaning the current rate of inflation in India stands at 11.49% Y-o-Y.

In 2008 industrial bodies, policy makers all were worried with the steadily rising inflation. The

middle of the year augmented the tension, as majority of the population was wary about a

double-digit inflation. However things changed within a few months. Inflation in India actually

dropped below 1% during the 3rd week of March 2009.

Inflation is such a situation where in too many people chase too few goods and/or too few

services that automatically leads to rise in the prices of the goods and services because of the

high demand.

On the other hand, when inflation drops below the desired mark, then too few people chase too

many goods and services, leading to under pricing of goods and services.

The India inflation is measured by the Y-o-Y variation of the Wholesale Price Index. While the

inflation as measured by WPI is currently at a very low level, the inflation measured by CPI thatis Consumer Price Index is at higher levels of 9 to 10%.

Inflation in India statistics

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 - -

2008 5.51 5.47 7.87 7.81 7.75 7.69 8.33 9.02 9.77 10.45 10.45 9.70

2007 6.72 7.56 6.72 6.67 6.61 5.69 6.45 7.26 6.40 5.51 5.51 5.51

2006 4.39 5.31 5.31 5.26 6.14 7.89 6.90 5.98 6.84 7.63 6.72 6.72

Source: www.Tax4India.com

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1.4 Calculation of inflation:

Some economists assert that Indias method of calculating inflation is wrong as there are

serious flaws in the methodologies used by the government.

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.

1.4.1 Wholesale Price Index (WPI)

WPI was first published in 1902, and was one of the more economic indicators available to

policy makers until most developed countries by the Consumer Price Index replaced it in the

1970s.

WPI is the index that is used to measure the change in the average price level of goods traded in

wholesale market. In India, a total of 435 commodities data on price level is tracked through

WPI, which is an indicator of movement in prices of commodities in all trade and transactions. It

is also the price index, which is available on a weekly basis with the shortest possible time lag

only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in

the economy.

1.4.2 Consumer Price Index (CPI)

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. Under CPI, an

index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the

index are a percentage relative to this one.

Economists V Shunmugam and D G Prasad say it is high time that India abandoned WPI and

adopted CPI to calculate inflation. India is the only major country that uses a wholesale index to

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measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures

the increase in price that a consumer will ultimately have to pay for.

1.4.3 How WPI (Wholesale Price Index) is calculated?

In this method, a set of 435 commodities and their price changes are used for the calculation. The

selected commodities are supposed to represent various strata of the economy and are supposed

to give a comprehensive WPI value for the economy.

WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show the

calculation, lets assume the base year to be 1970. The data of wholesale prices of all the 435

commodities in the base year and the time for which WPI is to be calculated is gathered.

Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the

price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10

The WPI of wheat for the year 1980 is:

(Price of Wheat in 1980 Price of Wheat in 1970)/ Price of Wheat in 1970 x 100

i.e. (6.10 5.75)/5.75 x 100 = 6.09Since WPI for the base year is assumed as 100, WPI for 1980

will become 100 + 6.09 =106.09.In this way individual WPI values for the remaining 434

commodities are calculated and then the weighted average of individual WPI figures are found

out to arrive at the overall Wholesale Price Index. Commodities are given weight-age dependingupon its influence in the economy

1.4.4 How is inflation rate calculated?

If we have the WPI values of two time zones, say, beginning and end of year, the inflation rate

for the year will be, (WPI of end of year WPI of beginning of year)/WPI of beginning of year x

100

For example, WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st 1981 is 109.72 then inflation

rate for the year 1981 is, (109.72 106.09)/106.09 x 100 = 3.42% and we say the inflation rate

for the year 1981 is 3.42%. Since WPI figures are available every week, inflation for a particular

week (which usually means inflation for a period of one year ended on the given week) is

calculated based on the above method using WPI of the given week and WPI of the week one

year before. This is how we get weekly inflation rates in India.

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1.4.5 Characteristics of WPI

Following are the few characteristics of Wholesale Price Index:

WPI uses a sample set of 435 commodities for inflation calculation

The price from wholesale market is taken for the calculation

WPI is available for every week

It has a time lag of two weeks, which means WPI of the week two weeks back will be available

now.

LITERATURE REVIEW

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Bicchal, Motilal. Sharma,Naresh Kumar and Kamaiah Bandi Evaluating

Core Inflation Measures for India.(2007).In their study they discussed various existing

approaches of measuring core inflation, evaluating their potential advantages and disadvantages.

Then a variety of measures of core inflation for India based on three methods are constructed.Among these measures, three are based on conventional ex-food and energy principle and one

measure that exclude fifteen of most volatile components are constructed. While constructing

exclusion based indices of core inflation, measures are constructed such that only a small weight

remains excluded from the index of the core inflation. The other two core measures are

variations of Neo-Edgeworthian Index are constructed by reweighting 69 disaggregated

components series of WPI. Then another class of core measures are computed based on weighted

exponential smoothing which was primarily developed by Cogley (2002). Estimates of core

inflation based on their indices are then calculated for 1995 to 2007 (on monthly basis).

Jha, Raghbendra.Inflation Targeting in India: Issues and Prospects.(2007).

Inflation targeting (henceforth IT) has emerged as a significant monetary policy framework in

both developed and transition economies. Some authors have argued that for transition

economies undergoing sustained financial liberalization and integration in world financial

markets IT is an attractive monetary policy framework. The present paper evaluates the case for

IT in India. It begins by stating the objectives of monetary policy in India and argues that

inflation control cannot be an exclusive concern of monetary policy with widespread poverty still

present. The rationale for IT is then spelt out and found to be incomplete. The paper provides

some evidence on the effects of IT in developed and transition economies and argues that

although IT may have been responsible for maintaining a low inflation regime it has not brought

down the inflation rate itself substantially. Further, the volatility of exchange rate and output

movements in transition ries adopting IT has been higher than in developed market economies. I

then discuss Indias experience with using rules-based policy measures (nominal targets) anddiscuss why India is not ready for IT. I show that even if the Reserve Bank of India (RBI)

wanted to, it could not pursue IT since the short-term interest rate (the principal policy tool used

to affect inflation in ries working with IT) does not have significant effects on the rate of

inflation. The paper concludes by listing monetary policy options for India at the current time

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Cochrane, John H. Inflation Determination with Taylor Rules: A Critical

Review. (2007).The new-Keynesian, Taylor-rule theory of inflation determination relies on

explosive dynamics. By raising interest rates in response to inflation, the Fed does not directly

stabilize future inflation. Rather, the Fed threatens hyperinflation or deflation, unless inflationjumps to one particular value on each date. However, there is nothing in economics to rule out

hyperinflationary or deflationary solutions. Therefore, inflation is just as indeterminate under

active interest rate targets as it is under standard fixed interest rate targets. Inflation

determination requires ingredients beyond an interest-rate policy that follows the Taylor

principle.

Saad-Filho, Alfredo. Inflation theory: a critical Literature review and a new

Research agenda. (2007). Marxian analyses of inflation tend to fall under three broad

categories, those that emphasize primarily the role distributive conflicts, monopoly power, or

state intervention on the dynamics of credit money. This article reviews these interpretations, and

indicates how they can be integrated. The proposed approach, based on the 'extra money' view,

departs from the circuit of capital and the endogeneity of credit money in order to explain

inflation in inconvertible paper money systems.

Bleaney, Michael and Francisco, Manuela. Exchange rate regimes and

inflation Only hard pegs make a difference. (2007).Previous research has suggested

that pegged exchange rates are associated with lower inflation than floating rates. In which

direction does the causality run? Using data from a large sample of developing countries from

1984 to 2000, we confirm that hard pegs (currency boards or a shared currency) reduce

inflation and money growth. There is no evidence that soft pegs confer any monetary

discipline. The choice between soft pegs and floats is determined by inflation: when inflation is

low, pegs tend to be chosen and sustained, and when inflation is high, either floats are chosen or

there are frequent regime switches.

Bruno, Michael and Easterly, William. Inflation and Growth: In Search of a

Stable Relationship. (2007).Are inflation and growth inversely associated, directly

associated, or not associated? Is the empirical inflation growth relationship primarily a long-run

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relationship across ries, a short run relationship across time, or both? Like a bickering couple,

inflation and growth just cannot seem to decide what their relationship should be.

Mihir, Rakshit. Inflation in a Developing Economy Theory and Policy. (2007).

Over the last one decade inflation in India has been due mostly to oil price shocks or below

normal harvests; only in 200607 did aggregate demand pressure seem to play a role in raising

the general price level. Inflation originating in supply shocks is generally transitory and

represents a movement from one equilibrium price level to another. Only when aggregate

demand exceeds the economy's production potential and the monetary policy is accommodative

can inflation be of a continuing nature. The two types of inflation call for quite different policy

responses. Anti-inflationary fiscal or monetary measures are required when there is an excess

demand situation, not when there is a sectoral shock. Nor are policies like oil price freeze or cuts

in customs-cum-excise duties on cement or metals appropriate for containing an increase in the

general price level: such measures are distortion and counterproductive in as much as they

reduce the country's full employment output and growth potential. Only in the case of shortage

of food and other essential items of poor men's consumption is it necessary to undertake supply

side management through reliance on PDS as well as open market sale of food grains by FCI.

The purpose of the present paper is to examine the nature of supply and demand side factors

causing inflation in the Indian economy and the efficacy of alternative anti-inflationarymeasures. In order to motivate the discussion we summarize in Section I the main features of two

recent inflationary episodes with special reference to their official diagnosis and the policies

pursued to reduce the price pressure. In the context of this survey we pose in Section II some

theoretical and policy issues, which appear important, but do not seem to have been properly

addressed. Sections III to V attempt at a resolution of these issues and provide in the process a

critique of the anti-inflationary policy response of the fiscal and monetary authorities, the final

section concludes.

Singh,Anushree. Inflation Hits Middle Class. (2008). In his study he stated that

The prices of basic commodities like fuel, food, education and a interest rates on loans for

durables are going up. The average Indian is now paying more on their loans as the interest

rates on home loans have gone up by 300 points in the past few months. As such the middle

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related crimes, while there are the dynamics of demand and supply in this case of ever rising

inflation, there is also a lack of planning and lack of will to act against hoarders and middle-

market man who inflate prices many a times to make big profits and cheat others. Let us hope

that Indian central as well as state governments take strong steps tackle this rising inflation and

keep it within suitable limits.

Jaiswal, Om Prakash. Inflation in India: A threat to the economy.(2010).

Currently India is under intolerable pressure of mounting inflation having one of the highest

consumer inflation in the world. Consumer price index stood at 13.19 in Sep. 2009. Price rise has

created serious problem such as discourage investment, loss confidence in domestic currency,

and hindering growth of country and causing disappointment in the economy etc. Economic

having opinion that inflation today is also caused by global factor beside domestic factors. India

is continuously paying the price for not having long-term strategy to tackle inflation. Inflation in

India is emerging major threat to the economy.

This paper explains in detail about inflation in India with defining it and adds types of inflation,

trends of inflation, myth about the inflation and critically evaluates the steps taken by the

government to control inflation. Further this paper investigates the causes and effects of inflation

to various groups of society and exploring solutions to check inflation.

Rana, MP. Inflation Affecting Middle Class Spending Patterns. (2011). In his

study he discussed that the middle class has been hard hit by the rising inflation, a survey titled

"Impact of Inflation among the middle class" conducted by Assocham said that the group had

curtailed its spending on entertainment, shopping and eating out by 65 per cent to manage their

monthly budgets. The Survey was conducted in major metropolitan cities such as Delhi,

Mumbai, Chennai, Kolkata, Ahmedabad, Hyderabad, Pune, Chandigarh and Dehradun.

The Survey also noted the bitter fact that the double digit inflation did not affect the higher

income group as it did not affect their earnings and thereby spending. According to the survey,

the average middle class household in India spent roughly 4000 to 6000 rupees per month on

entertainment, shopping and eating out which it has been forced to reduce to Rs 2500 due to the

rising market prices. On the other hand, the average amount of money that the high income

group spent on entertainment, shopping and eating out during the period of single digit inflation

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was Rs 10,000 to 20,000 per month which remained unchanged even during the times of double

digit inflation.

The people in Delhi were the most hit with inflation followed by Ahmedabad, Chandigarh,

Mumbai and Chennai. Roughly 500 people from each of the metropolitan cities were picked up

for the survey.

RESEARCH METHODOLOGY

3.1 RESEARCH

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Research is a way to systematically solve the research problem. The research methodology

includes the various methods and techniques for conducting a research.

Defining the Research Problem and Objective:

It is said A problem well defined is half-solved. The first step in research methodology is to

define the problem and deciding the research objective. The objective of my study is to know

Impact of inflation on middle class.

3.2 RESEARCH OBJECTIVES

To study the impact of inflation on budget and standard of living of middle class.

To find out the changes in saving pattern of middle class.

To study the steps taken by government to control the inflation.

3.3 SOURCES OF DATA

For systematic research, information is required from different sources of data Primary Source &

Secondary Source.

3.3.1 Secondary Data:

Secondary data are those which have already been collected by someone else and which have

already been passed through the statistical process. In this case it is not confronted with the

problems that are usually associated with the collection of original data.Secondary data means

the data which are readily available from different sources. In our study secondary data was

easily available so we have used secondary data and findings and suggestions have been based

on such information. We have gathered these data from the websites, journals, newspapers,

books etc..

Impact of Inflation on Middle Class

4.1 Effect of Inflation

Inflation is not considered bad so long as it creates additional employment to the factors of

production. It becomes bad the moment it goes out of control. Inflation may be compared to a

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robber. It deprives the victim of some possession with the difference that robber is visible,

inflation is invisible. The robber's victim may be one or a few at a time. But the victim of

inflation is the whole nation. The robber may be dragged to a court of law but inflation is legal.

Inflation disrupts the economy and paves the way for social and economic upheavals, besides

being highly demoralizing.

The entrepreneur faced with the demand for higher wages and trying to keep up with such a

demand, a retired person trying to manage his living on a fixed pension, a person with fixed

income meeting his needs of household expenditure by borrowing from banks and other financial

organizations, and the housewife struggling hard to serve food in a period of rising prices are

aware of the effects of inflation without being told about it.

Effects of inflation on distribution: Inflation has the effect of redistributing income because

prices of all factors do not in the same proportion. Entrepreneurs stand to gain more than wage

earners or fixed income groups. Speculators, hoarders, black marketers and smugglers gain on

account of windfall profits. Change in the value of money also result in the redistribution of

wealth, partly because during inflation there is no uniform rise in prices and partly because debts

are expressed in terms of money. Inflation is a kind of hidden tad, highly harmful to the poorer

sections of society. Thus, poor become poorer.

Effects of inflation on wage earners: Wage earners generally suffer during inflation, despite the

fact that they obtain a wage rise to counter the rise in the cost of living. However, wages do not

rise as much as the rise in price of those commodities, which the workers consume. Further,

wages are allowed to rise much later than the rise in prices. Thus, there is a lag between the two,

which works to the disadvantage of the worker. If the workers are organized, they may not

suffer much during inflation but if they are unorganized like the agricultural laborers they may

suffer more as they may not find it easy to get their wages increased.

Effects of inflation on middle class and salaried persons: The hardest hits are the persons who

receive fixed income, usually called the middle class. Persons who live on past savings, fixed

interest or rent, pensions, salaries etc., suffer during periods or rising price, as their incomes

remain fixed. The middle class who by hard work take care of children's education, livelihood in

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the times of sickness and old age and accommodate day to day expenses find it difficult to

survive the times of serious inflation.

Effects of inflation on public morale: inflation result in arbitrary redistribution of wealth

favoring businessmen and debts, and hurting consumers, creditors, petty shop-keepers, small

investors and fixed income earners. This lowers the public morale. The ethical standards and

the public morale fall to miserably low levels during the period of hyperinflation.

Effects of inflation on debtors and creditors: Debtors borrow from creditors to repay with

interest at some future date. Changes in price level affect them differently at different time

periods. During inflation when the prices rise and the real value of money goes down, the

debtors pay back less in real terms than what they had borrowed and thus, to that extent they are

gainers. On the other hand, the creditors get less in terms of goods and services than what they

had lent and lose to that extent.

Effects of inflation on Farmers: The prices of farm products go up faster than costs. Costs lag

behind prices of product received by the farmers. It has been observed in India that inflationary

tendencies during war and post-war periods have helped farmers in paying off their old debts.

Moreover, farmers are generally debtors and have to pay less in real terms, while the land

revenue, taxes, etc., do not rise much. Thus farmers generally gain during the periods of

inflation.

Effects of inflation on the entrepreneurs: When prices rise, producers, traders, speculators and

entrepreneurs gain on account of windfall profits because prices rise at a faster rate than the cost

of production. Besides, there is time lag between the price rise and the increase in cost.

Moreover producers gain because the prices of their stock go up due to inflation. Also they

generally being borrowers of money for business purpose, stand to gain.

Effects of inflation on Investors: Different kinds of investors are affected differently by

inflation. An investor may invest in bonds and debentures which yield a fixed rate of interest or

in real estate or equities (shares) whose returns (dividends) rise and fall with profits earned by

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the companies concerned. When prices rise, the returns on equities go up on account of the rise

in profits, while the bond and debenture holders gain nothing, as their income remains fixed. By

the same logic, holders will lose during depression, while the debenture and bondholders gain.

Effects of inflation on Government: In a mixed economy, the public sector is affected by

fluctuations in price level. As prices rise, the Government has to spend more on goods and

services, including raw materials, for carrying through their projects. Estimates are revised and

taxes are raised during the period of inflation.

4.2 Impact of Inflation

Inflation is a very important aspect that needs to be considered since it impacts ones earnings,

investments, purchasing power & lifestyle.

In March 2010 a number of agencies are expected to assess inflation for the fiscal year of 2009-

2010 at anywhere between 6.5% (RBI estimate as of October 2009 policy review) to 8%

[Economic Times]

This means that on average goods and services in India will cost from 6.5% to 8% more as

compared to the previous year.

Consider your investments. If you have been holding a diversified portfolio with debt and equity

and earned around 15%, then you are doing well because you earned money in real terms.

Anything more than 15% is icing on the cake. If you have been holding all your money in FDs

yielding around 6% to 7% or in a cash account at bank earning about 3% to 4%, then you have

actually lost money this year. You will purchase less for the same price than you could in the

previous year.

Inflation is more important in emerging markets like India than developed markets. The

currency, prices, economy, and the general economic system are more volatile and they aregrowing faster and will generally produce sharp swings in inflation that need to be closely

monitored. If you watch carefully, invest well and are well advised, you can do well. In a highly

inflationary environment, investments also tend to earn higher returns to reward investors.

Inflation is not static. Inflation for the assessment year 2007-2008 was 4.5%. It changes all the

time and it is difficult to predict it with great accuracy.

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Another factor to be aware of is how uneven inflation can be. Education costs in both the USA

and in India have far outpaced average inflation for many years. This is very important while

planning your childs higher education, whether in India or abroad. Food prices worldwide also

come under the higher inflation rates (for November increase was 19% as per the Economic

Times of Dec 14)

Retirement is a key area to watch out for. One needs to save large amounts & save early to get

the retirement benefits to support in old age. The era of company-offered pensions is declining

and one needs to take care of himself/herself. Even those persons with a pension will soon find

its value eroding if the pension amount is fixed but the economy is not.

Whatever is the strategy used, one needs to be aware of the inflation rate and make sure he/she is

keeping up with it, if not surpassing it, in their investments and other earnings.

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Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 - -

2008 5.51 5.47 7.87 7.81 7.75 7.69 8.33 9.02 9.77 10.45 10.45 9.70

2007 6.72 7.56 6.72 6.67 6.61 5.69 6.45 7.26 6.40 5.51 5.51 5.51

2006 4.39 5.31 5.31 5.26 6.14 7.89 6.90 5.98 6.84 7.63 6.72 6.72

Source: www.Tax4India.com

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FINDINGS AND SUGGESTIONS

FINDINGS: During the year 2006 in the month of October the inflation rate was 7.63% and it

increases to 11.49% in the year 2009,inflation rate has increased by 3.86%in this period.

Debtors borrow from creditors to repay with interest at some future date, but during

inflation when the prices rise and the real value of money goes down, the debtors pay

back less in real terms than what they had borrowed.

The prices of basic commodities like fuel, food and interest rates on loans for durables

has gone up; as a result middle class cannot afford those goods that they had previously

been able to afford.

Inflation results in reduction/decrease in the savings of the middle class people.

The ethical standards and the public morale fall due to low levels during the period of

hyperinflation.

Inflation had adversely affected the life style of middle class people.

When the prices rise, producers, traders, speculators and entrepreneurs gain on account of

windfall gains because prices rises at a faster rate than cost of production.

Inflation jack up the expense of private education as results a lot of parents are unable to

send their children to private schools.

Wages of wage earners has not increase in the same proportion in which their cost of

living has increased.

Health care sector is also affected because of inflation. Middle class people cant afford

to pay high medical charges as the treatment of various diseases like cancer, diabetes,

heart diseases etc has also increased.

SUGGESTIONS:

RBI needs to adopt monetary measures for controlling inflation like increasing the

discount rate higher reserve ratio, open market operations and selective credit control.

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The government should reduce public expenditure or increase public revenue to keep a

check on inflation.

There is need to stop corruption.

Export duties imposed on various items need to be reduced.

Hoarding of basic commodities like food: vegetables, pulses; fuel etc should be stopped.

Public expenditure should be reduced and savings need to be encouraged.

Conservative policy is to be followed by RBI.

Bank rate need to be increased, control the flow of money in the economy.

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Inflation Affecting Middle Class Spending Patterns

MP Rana, Tuesday 05th April 2011

Highlighting the fact that the middle class has been hard hit by the rising inflation, a

survey titled \"Impact of Inflation among the middle class\" conducted by Assocham

said that the group had curtailed its spending on entertainment, shopping and eating

out by 65 per cent to manage their monthly budgets. The Survey was conducted in

major metropolitan cities such as Delhi, Mumbai, Chennai, Kolkata, Ahemedabad,

Hyderabad, Pune, Chandigarh and Dehradun.

The Survey also noted the bitter fact that the double digit inflation did not affect the

higher income group as it did not affect their earnings and thereby spending. According

to the survey, the average middle class household in India spent roughly 4000 to 6000

rupees per month on entertainment, shopping and eating out which it has been forced

to reduce to Rs 2500 due to the rising market prices. On the other hand, the average

amount of money that the high income group spent on entertainment, shopping and

eating out during the period of single digit inflation was Rs 10,000 to 20,000 per month

which remained unchanged even during the times of double digit inflation.

The people in Delhi were the most hit with inflation followed by Ahemedabad,

Chandigarh, Mumbai and Chennai. Roughly 500 people from each of the metropolitan

cities were picked up for the survey.

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Money & Finance

Year : 2007, Volume : 3, Issue : 2

Inflation in a developing economy theory and policy

Rakshit Mihir

We are all structuralists, knowingly or unknowingly.

Adapted from Molier, The Would-be Gentleman

Abstract

Over the last one decade inflation in India has been due mostly to oil price shocks or below normal

harvests; only in 200607 did aggregate demand pressure seem to play a role in raising the general price

level. Inflation originating in supply shocks is generally transitory and represents a movement from one

equilibrium price level to another. Only when aggregate demand exceeds the economy's production

potential and the monetary policy is accommodative can inflation be of a continuing nature. The two types

of inflation call for quite different policy responses. Anti-inflationary fiscal or monetary measures are

required when there is an excess demand situation, not when there is a sectoral shock. Nor are policies

like oil price freeze or cuts in customs-cum-excise duties on cement or metals appropriate for containing

an increase in the general price level: such measures are distortionary and counterproductive in as much

as they reduce the country's full employment output and growth potential. Only in the case of shortage of

food and other essential items of poor men's consumption is it necessary to undertake supply side

management through reliance on PDS as well as open market sale of foodgrains by FCI.

The purpose of the present paper is to examine the nature of supply and demand side factors causing

inflation in the Indian economy and the efficacy of alternative anti-inflationary measures. In order to

motivate the discussion we summarize in Section I the main features of two recent inflationary episodes

with special reference to their official diagnosis and the policies pursued to reduce the price pressure. In

the context of this survey we pose in Section II some theoretical and policy issues which appear

important, but do not seem to have been properly addressed. Sections III to V attempt at a resolution of

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these issues and provide in the process a critique of the anti-inflationary policy response of the fiscal and

monetary authorities. The final section concludes.

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Inflation In India: Threat

To Economy Submitted by: sonujaiswal

Date Submitted: 07/01/2010

Category: Business

Words: 3584

Pages: 15 Views: 1271

Popularity Rank: 1138

INFLATION IN INDIA: A THREAT TO THE ECONOMY

* Om Prakash Jaiswal

ABSTRACT

Currently India is under intolerable pressure of mounting inflation having one of the highest consumer

inflation in the world. Consumer price index stood at 13.19 in Sep. 2009. Price rise has created serious

problem such as discourage investment, loss confidence in domestic currency, and hindering growth of

country and causing disappointment in the economy etc. Economic having opinion that inflation today is

also caused by global factor beside domestic factors. India is continuously paying the price for not having

long term strategy to tackle inflation. Inflation in India is emerging major threat to the economy.

This paper explains in detail about inflation in India with defining it and adds types of inflation, trends of

inflation, myth about the inflation and critically evaluates the steps taken by the government to control

inflation.

Further this paper investigates the causes and effects of inflation to various groups of society and

exploring solutions to check inflation.

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http://www.allfreeessays.com/profile/sonujaiswal/http://www.allfreeessays.com/categories/Business/4/0.htmlhttp://www.allfreeessays.com/profile/sonujaiswal/http://www.allfreeessays.com/categories/Business/4/0.html


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WPI Inflation in India at

7% and climbing?April 5, 2008Prax(posted by)

The WPI inflation is now at 7% and climbing, putting the Govt the fm and the RBI in a tight spot. I had

expected this to happen as i wasnt quite sure of the FMs management skills andmentioned it in my

budget post Budget what matters most.

It is hurting the middle classes as everything isgetting expensive, be it vegi oil or rice wheat, pulses,

milk or other essentials. Summers mean more Electricity bills in a power deficit nation of ours. I worry

about the millions that have 3/4 children to feed living on 2$ a day not getting what they were promised

by the UPA during the last general elections, in terms of subsidised food promised in BPL cards on

account of shortages due to mismanagement and huge divergence from open market prices leading to

black marketing.

And it shows, cause it is now affecting budgets of the upper middle class too, many of who have also been

burned by the market fall, and purchased their second house at atrocious prices on floating rate loans. The

press has woken up quite late as normal and is doing the round of shopping malls and markets, countingeach rupee spent in a days shopping, instead of the regular cricket updates, Bacchan updates, scandals

gossip and interviews with successful entrepreneurs in 5 star hotels rediff has a wierd articles likethis

one.

Looks like real returns on deposits after effects of inflation based on real prices or CPI , compliance costs

and taxes should now be negative, for the aam admi.

Pushing Subsidy burden on PSU Oil cos and Banks in terms of expecting them to cushion the

Governments populous decisions is old news.

Looks like we are knocking on the Diktat / Control raj doors, as the Govt is in a hurry to cut inflation by

attacking the prices of the WPI basket constituents like steel , cement etc by some closed door coercion to

Pvt Companies, and some threat of stern action and invoking provisions of draconian price fixing laws of

the prohibition era, while the rail ministry on the other end increases freight rate, increasing their costs.

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http://techntrek.wordpress.com/author/vkn999/http://techntrek.wordpress.com/author/vkn999/http://techntrek.wordpress.com/2008/02/29/budjet-2008-what-matters-most/http://techntrek.wordpress.com/2008/02/29/budjet-2008-what-matters-most/http://techntrek.wordpress.com/2008/02/29/budjet-2008-what-matters-most/http://techntrek.wordpress.com/2008/02/29/budjet-2008-what-matters-most/http://economictimes.indiatimes.com/Economy/Retail_prices_jump_by_11_pc/articleshow/2926062.cmshttp://economictimes.indiatimes.com/Economy/Retail_prices_jump_by_11_pc/articleshow/2926062.cmshttp://economictimes.indiatimes.com/Economy/Retail_prices_jump_by_11_pc/articleshow/2926062.cmshttp://www.rediff.com/getahead/2008/apr/04inflation.htmhttp://www.rediff.com/getahead/2008/apr/04inflation.htmhttp://www.rediff.com/getahead/2008/apr/04inflation.htmhttp://techntrek.wordpress.com/author/vkn999/http://techntrek.wordpress.com/2008/02/29/budjet-2008-what-matters-most/http://techntrek.wordpress.com/2008/02/29/budjet-2008-what-matters-most/http://economictimes.indiatimes.com/Economy/Retail_prices_jump_by_11_pc/articleshow/2926062.cmshttp://www.rediff.com/getahead/2008/apr/04inflation.htmhttp://www.rediff.com/getahead/2008/apr/04inflation.htm


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The RBI is attempting to suck out liquidity through mkt operations and an expected CRR hike, but will it

be enough? Worse we are importing US inflation by holding the Rupee to the dollar at close to Rs40. Read

Ilas post on dollar purchase by RBIand watchAjay Shah for his excellent analysis on

Worldwide Inflation of commodities.

Things are going to be interesting, and markets fragile. I think sooner than later the Property markets

will also start to correct by a fair bit.

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Inflation 4

Documents

Transcript of Inflation 4