December 17th, 2009

InflationInflation is a general rise in prices of goods and services. Inflation results in loss of value of money. If some commodity demands a price of 10 rupees 10 years ago, it now demands Rs. 50. This means there is loss in value of rupee by about five times w.r.t. to that commodity. So in general all commodities appreciate over time. This is inflation. Inflation can be compared to nature. One talks about it but does nothing about it.

As in the case of nature, which is thus far beyond our control, one can take certain defensive measures to offset the impacts of inflation. Hence most economies have not had much success in dealing with inflation. Two U.S. presidents (Ford and Car­ter) have referred to it as “public enemy number one”. Indian Prime Minister Dr. Manmohan Singh calls it the first priority of his government to suppress inflation below acceptable levels. Inflation remains a matter of concern because it is inevitable, per­sistent, and apparently immune to numerous remedies. Experts in the economics and numerous politicians have tried to give various solutions, none of which have gained absolute acceptance. The nature is tolerated because one cannot control it; inflation is not, because it is thought to be controllable–at least within limits.

Inflation has been defined as too much money chasing too few goods. This attributes the cause of inflation to monetary growth relative to the output of goods and services. Inflation is a persistent rise in the general level of prices of all good and services taken together. A specific price in one commodity may rise dramatically as in the case of oil or gas. But if this specific price is nullified by declines in prices of other commodities, the general price level may not rise at all i.e. there is no inflation. The general level of prices depends on a series of individual price changes and their relative importance some measure of these factors, namely, a price index is required.

But rise in some individual price index will not result into what is generally meant by inflation, its consequences won’t be particularly serious if the change in the price index quickly reversed itself and price stability is maintained. To become and remain a problem demanding concern, it should involve a long suc­cession of increases in a price index.

A price index’s acceleration must take a fairly sharp increase over some previous norm or accustomed level–a rise that either continues to accelerate or that stays at the new higher level. From 1967 on, the CPI (a form of index for measuring inflation) increased at rates well above 4% and the rate of increase has risen steadily from 6% per annum in 1976 to about 13% in 1979-1980.

Thus inflation can be defined as a sharp increase in the rate of change of a price index above an acceptable level that lasts over a time period long enough to create expectations of its future persistence.

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