Inflation ControlSubtitle

ContentIntroductionTypes of InflationCauses of InflationMeasures to Control InflationExample & Cases

Introduction

InflationInflation is a sustained increase in the general price level of the goods and services in an economy over a period of time.Reduction in the purchasing power per unit of money-a loss of real value in the medium of exchange and unit of account within the economy.Measured as percentage rate of change of price index.The annualisedinflation rate in Indiais 5.4% as of June 2015, as per the Indian Ministry of Statistics and Programme Implementation.

Types of Inflation

Types of Inflation

Causes of InflationThere are two theories related to the causes of the inflation 1. Demand pull inflationExcess aggregate demand in the overall economyBusiness respond to high demand by raising prices to increase profit margin

Causes of Inflation2. Cost push inflationCost of production or operation are increasing due toIncrease in wagesIncrease in cost of production inputsIncreased cost of imported components

Measures to Control InflationThe basic causes of the Inflation are1.Excess money supply in an Economy2.Excess purchasing power in the hands of public.So it is more important to deal with these factors to bring inflation in control.

Monetary MeasuresTo control the Money SupplyBank Rate Policy or Credit ControlCash Reserve RatioOpen Market OperationMaintaining Gold StandardFixed Exchange Rates

Bank Rate PolicyBank rate-Interest rate at which RBI lends money to the domestic banksIncrease in bank rates leads to Increase in deposit rate - Increase in lending rateDiscourages businessmen and consumers to take loansHence the controlled supply of money reduces the inflationary pressure on the economy

Open Market OperationsSales and purchase of government securities and bonds by the central bank.Gov. securities- Bonds & Debentures with certain maturity period are issued by a government to raise the fund necessary to pay for its expenses.Sale of the securities in the open market helps to regulate the inflation.

Cash Reserve RatioBanks are required to hold a certain proportion of the deposit in the form of cash.Higher the Cash Reserve Ratio=> Lower the amount for lending and investments with the banks.Tool for the RBI to control the amount that banks lent i.e. to control the liquidity in the banking system and the country.

Maintaining Gold Standard & Fixed Exchange RatesFix the prices of their domestic currencies in terms of a specified amount of gold.National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price.A country's exchange rate regime under which the government or central bank ties the official exchange rate to another country's currencyBecause exchange rates were fixed, the gold standard caused price levels around the world to move together.

Fiscal MeasuresGovernment Expenditure-Gov. has to reduce their expenditure and increase their savings to control the supply of moneyTaxation-Increasing some tax rates and imposing some new taxesPublic Borrowings- the objective is to take away from the public excess purchasing power. Public borrowing may be voluntary or compulsory. Debt Management-Stop the repayment of public debt to control the inflationary pressureAdopt surplus budget

Fiscal MeasuresOver-valuation-To control the over valuation of money it is essential to encourage imports and discourageexportsOvervaluation of domestic currency in terms of foreign currencies will serve as an anti-inflationary measure as it will discourage exports and thereby result in an increased availability of good and services at homeencourage imports add to domestic stock of goods and services, by lowering the price of foreign inputs, it will help in checking the upward cost-price spiral.

Other MeasuresExpansion of OutputThis lowers the excess demand of a commodity and lowers its price.Rational Wage PolicyWages should be allowed to rise only if there is an increase in the productivityIn such a situation, higher wages will not give rise to higher costs and hence to higher pricesPrice Control & RationingThe objective of price control is to lay down the upper limit beyond which, the price of a particular commodity will not be allowed to rise.Demand can also be controlled through rationing of essential commodities

5 Extreme Cases of hyperinflation

HUNGARY

Littered Hungarian peng currency being swept from the street after a new currency was introduced.

Highest monthly inflation rate:13,600,000,000,000,000%

Highest currency denomination: One trillion

Time it took prices to double: 15.6 hours

HUNGARYHungarys hyperinflation of 1945-46 was the most severe instance of hyperinflation in history. Costs of preparing for World War II led to loose monetary policy and depreciation of the Hungarian peng currency. At the end of the war the Hungarian government began rampantly printing money. Denominations got so high that milpeng (1 million peng) and bilpeng (1 billion peng) denominations were introduced to reduce the number of zeros and make calculations easier. Prices could more than double in just one day. A new currency called the forint was introduced in 1946, and old peng were littered in the streets.

ZIMBABWE

Highest monthly inflation rate:79,600,000,000%

Highest currency denomination: 100 trillion

Time it took prices to double: 24.7hours

Inflation in ZimbabweDecember,2008:Inflation at 6.5 quindecillion novemdecillion percent(65 followed by 107 zeroes)

Inflation in Zimbabwe

CausesPost Independence Land Re-distribution System-During the reform program most of the farm lands were taken over by local people and other government officials who had only little knowledge about the agriculture and related activities.War Funding-Mugabe government printed more money to help financing the warEconomic Mismanagement-Over-printing of money-To deal with the issue of financial crunch which the war brought, the govt printed money and a lot of them

CausesGovernments often implement price controls in an attempt to control inflation. This frequently leads to shortages, as producers opt for alternative markets to avoid the mandated price ceilings that dont cover production costs.

Effects of Hyperinflation in ZimbabweSevere UnemploymentSevere food crisisPopulation Displacement-

Yugoslavia/Republika Srpska

500 billion dinar banknote

Highest monthly inflation rate: 313,000,000%Highest currency denomination: 500billionTime it took prices to double: 1.4 days

GERMANY

50 million mark banknote

Highest monthly inflation rate:29,500%Highest currency denomination: 100trillionTime it took prices to double: 3.7 days

Greece

Highest monthly inflation rate: 13,800%

Highest currency denomination: 100 billion

Time it took prices to double: 4.3 days

POLICY IN INDIA REGARDING INFLATIONThe Reserve Bank of Indias (RBI) has a target of 8% by January 2015 and 6% by January 2016.Recently, while cutting the CRR rates by 0.25 basis points, RBI said higher diesel prices would increase inflation in the short term, but the reform measures were significant as they would strengthen the countrys economic fundamentals.The central bank said the governments recent actions had paved the way for more favourable economic conditions by initiating a shift in expenditure away from consumption by reducing fuel subsidies and toward investment, including through foreign direct investment. Further, RBI is supposedly did not reduced the interest rates just to not to put pressure on the inflation.

References:Wikipediahttps://www.globalfinancialdata.com/gfdblog/?p=2382http://www.cnbc.com/id/41532451http://www.businessinsider.com/worst-hyperinflation-episodes-in-history-2014-4http://www.nytimes.com/1993/12/31/world/where-zillion-loses-meaning.html

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