Archive for December, 2009

Inflation And Economy

December 12th, 2009 Comments off

Inflation And Economy The rate of inflation and the economy are closely related to each other. The growth of the economy of the nation is judged by the growth in the Gross domestic product or the GDP but that is not enough to be able to understand as to how many people are actually doing well because of the rise in the Gross domestic product. The Gross domestic product is a gauge often used by the Government to show that India is indeed doing well. But often these ratings are not a mirror image of what seems to be happening in the country because the inflation rate is also a tool which helps us to witness what the common man is going through because the inflation rate carries with itself the prices of fruits, vegetables, cereals and other essential commodities which are required for daily usage.

The Inflation rate in India often crosses six or seven percent. Out side of India in the developed countries the rates of seven percent and beyond are unheard of. But in India the inflation goes high at several times. It has also led to the downfall of various governments who have been ineffective in controlling the rate of inflation and hence have invoked the anger of the people. The economic condition of the country and the rate of inflation go hand in hand and they should not always be talked about as alien to each other or not connected.

And hence countries should be looking at a high GSP growth and also on the other hand, low rates of inflation which will all be beneficial to the country and its people.

Inflation Rate

December 11th, 2009 Comments off

Inflation Rate Since the economic reforms in 1991, the Indian economy has been growing year after year. The past decade and a half has seen the Gross Domestic product that is the GDP rise to scorching height. But the downside is that in the past few years, the inflation rate has also been going up which a cause of concern for the economists as well as the members of the Government. Thus this high growth of economy has also been a reason for the rise in the Inflation rates.

The inflation rates are closely monitored by the Government for it is the inflation rate that has a direct impact on the common man. The Gross domestic product or the GDP may be extremely high but it may not have a direct impact on the common man where as the inflation rate surely does. Thus a high inflation rate is detrimental to the overall growth of the country and hence should be avoided. The Reserve bank of India or the RBI takes effective steps in order to reduce the rate of inflation whenever it reaches alarming heights. Inflation has a direct impact on the prices of fruits, vegetables and other basic necessities. The Reserve bank if India some times increases the cash reserve ratio or the CRR in order to arrest the rampaging rate of inflation.

The rate of Inflation if within the range of two o four percent is said to be moderate but once it starts to grow beyond the five percent it raises the alarm bells. India has at times witnessed an inflation rate of greater than seven percent as well and touching eight or nine percent. In such circumstances, the Government gets under tremendous pressure to start trying to reduce the rate of inflation.

Inflation In The USA

December 8th, 2009 Comments off

Inflation In The USA Inflation is the Federal Reserve’s biggest challenge, according to a USA TODAY survey of 53 top economists, who predicted slightly slower expansion and somewhat sharper price pressures. Inflation is always a cause for concern fro the government of a country irrespective of which country you are in. In the United States of America as well, the rate of inflation has often been a contentious issue.

But over the years, the American economy is going through recession which is why the valure f their currency is faling down with respect to the other major currencies of the World. For example with respect to the Pound, Euro, Rupee and the Yen, the value of a dollare has always be on the decrese.

The United States of America is currently undergoing a recession phase due to increasing real estate prices, a reduction in the income of the average person and the rising oil prices all across the World which even went as high as 100 $ per barrel. Thus though the economy has been under recession, the actual rate of inflation will continue to remain low and satisfiable.

It has stayed within the permissible amounts of less than three percent and has not created much of a problem for the American economists or the American politicians. But if the inflation rate of the United States of America would go up then it would have a direct impact on the inflation rates of many of the countries of all over the world

RBI Policy On Inflation

December 8th, 2009 Comments off

RBI Policy On Inflation

The Reserve Bank of India is the central bank of India and hence it is the duty of the central bank of the country to reduce the rate of inflation in case it goes high. The central bank works for the welfare of the public of the country. It often gives loans to the central as well as the state government whenever they are in need of it. The central bank has to manage the money supply to the country as it is the Banker of the government and the people. One important thing to note is unlike many other private or nationalized banks that exist in the country, the reserve bank of India is not a profit making institute. The major function of the Reserve bank of India is hence to curb the inflation rate with in the acceptable norms.

Since the major economic reforms that took place in the year 1991 under the then finance minister Mr. Manmohan singh also affected the policies of the Reserve bank of India tremendously. The Reserve bank has now adopted a policy of the relaxation of interest rates and thus having more influence on the market of the country. The Reserve bank also has a monetary policy that makes an effort to increase the advantages regarding the money control policy of the banks.

The major way of fighting and curbing inflation is to be able to decrease the aggregate spending monetary policy that can thus help in reducing the pressure due to demand. How the monetary policy works is by controlling the cost and the availability of the credit resources. But how effective this method of curbing inflation can be depends largely on the co operation of other commercial private and nationalized banks. Also the cash reserve ratio can be changed inn order to reduce the effects of inflation.

Inflation In The World

December 8th, 2009 Comments off

Inflation In The World To be able to understand the rate of inflation in the World, we would have to be looking individually at the inflation rates of the countries. Almost all around the World the inflation seems to be going high as compared to what the inflation rates were perhaps about a decade or two back. The central banks of respective countries have been trying hard to be able to reduce the inflation rate in their respective countries and hence curb the effects of inflation. As per the data of the year 2007, such was the scenario of the inflation rates around the World.

In entire North America, that is the parts of the United States of America, Canada in the north and Mexico, the inflation rates were managed at a healthy two to five percent. But in South America it was a different story altogether with most of the countries displaying a very high rate of inflation as compared to parts of North America with the inflation rates going above the mark of fifteen percent in many countries. In parts of India and the nearby countries of Pakistan, Nepal and Bhutan all belonging to the Indian subcontinent, the inflation rates at an average were found out to be between five to ten percent. In parts of china the inflation rates were a bit lower than that.

In all the parts of Europe, the inflation rate was manageable not going beyond the mark of five percent. But in parts of Africa, many countries had inflation rates above ten percent. Zimbabwe has seen the inflation rate going upward every year for the past few years. In Australia and New Zealand, the rate of inflation was again below five percent whereas in parts of Russia, it was more than ten percent.

How Inflation Is Measured

December 7th, 2009 Comments off

How Inflation Is Measured To measure inflation, a number of goods that are representative of the economy are put together into market basket. It is then compared over time. This results in a price index. Price index shows the changes in the cost of the present market basket as a percentage of the cost of that identical basket in the previous year.

There are two main price indexes that measure inflation:

  • Consumer Price Index (CPI) – A measure of price changes in the retail market of consumer goods and services such as petrol, food, clothing and automobiles. The CPI measures price change from the perspective of the retail buyer. It is the real index for the common people. It reflects the actual inflation that is borne by the individual. This is not taken into consideration in India.
  • Wholesale Price Index (WPI): It is used in India. It takes into account the rise in prices of goods and services in a select range of goods and services at the wholesale level. Since the general public does not buy at the wholesale level, it does not give the actual feeling of the amount of pressure borne by the general buyer. But the increase in wholesale prices does affect the retail prices and as such give a feeling of the consumer prices.
  • Producer Price Indexes (PPI) – A group of indices that measure the average change over time in selling prices by producers of goods and services. They measure price change from the point of view of the seller.
  • Cost-of-living indices (COLI): These show the fixed incomes and contractual incomes based on measures of goods and services price changes.

In the long run, the various PPIs, WPIs and the CPI show a similar rate of inflation. In the short run PPIs often increase before the WPI and CPI. Investors generally follow the CPI more than the PPIs. In India WPI is used instead of CPI.

Inflation Control

December 6th, 2009 Comments off

Inflation Control Controlling inflation is one of the most important objectives of government economic policy in many countries. Effective policies to control inflation focus on the causes of inflation in the economy. Monetary policy controls the growth of demand by creating an increase in interest rates and a reduction in the real money supply.

Higher interest rates reduce aggregate demand in three main ways:

• Discouraging borrowing by both households and organizations.

• Increasing the rate of saving. Thus people will save more and spend less. Thus money in the market will be less

• The rise in mortgage interest payments will reduce homeowners’ real ‘effective’ disposable income and their ability to spend. Increased mortgage costs will also reduce market demand in the housing market

• As the cost of borrowing will increase business investment may also decrease.

The government generally alters the fiscal policy to fight inflation:
• It increases the direct taxes thus causing a fall in disposable income
It lowers spending which decreases demand

Exchange rate appreciation:
An appreciation in the currency makes exports more expensive and reduces the volume of exports and boosts supply thereby reducing aggregate demand. It also demands firms to keep costs down to remain competitive in the world market. A stronger currencies reduces import prices. This makes raw materials and components cheaper.

Labour market reforms:
The weakening of trade union strength, the growth of part-time and temporary workforce along with the concept of flexible working hours have increased flexibility in the job market. This helps get maximum productivity out of individuals and companies.

Supply-side reforms:
Supply side reforms seek to increase the productivity of the economy in the long run and raise the rate of growth of capital productivity. Productivity helps to control unit costs and eases pressure on producers to raise their prices.

Food Inflation

December 4th, 2009 Comments off

Food Inflation The rise in prices of edible commodities is called food inflation. Today, we are going through the worse level of inflation in the last 17 years. The overall rise in food prices in 2007 in the U.S., according to federal statistics, seems to be bearable — 4 percent. But it is the highest rate since the early 1990s, and it is more than the pay raises most people are receiving and it definitely seems to be getting worse.

The most significant part is that prices for many staples are rising much faster than the overall consumer price index for food. Eggs are 25 percent milk is up 13 percent, cheese nearly 15 percent costlier than a year ago. In Pakistan and Thailand, paramilitary troops have been deployed to prevent food theft from farms and storehouses.

World Bank president Robert Zoellick warned that 33 countries are at risk of social agitation because of rising food prices. Much of this rise is being attributed to the diversion of food-crops into energy generation .For example; maize is extensively used to make bio-diesel. This causes a lot of pressure on maize prices which then cause all the commodities to go up. Also, a lot of farms in Brazil are now cultivating plants like jathropa which is used to make bio diesel, instead of food grains.

This is creating scarcity of food grains in the world market shooting up prices. Countries like India have placed severe restrictions on export of food grains from their country causing a speculative interest in commodities all over the world. Thailand, which is largest exporter of rice in the world, is not able to export enough of it. This has led to two fold increase in the price of rice.

Effects Of Inflation

December 3rd, 2009 Comments off

Effects Of Inflation A small amount of inflation is viewed as having a beneficial effect on the economy. One reason for this is that it is generally difficult to renegotiate prices and wages once they are fixed to a level. With increasing prices it is easier for relative prices to adjust automatically.

Because of inflation, the price of any given good is likely to rise over time, hence consumers and businesses may choose to make purchases sooner than later before the worth of their money has eroded. This effect will keep an economy active in the short term by encouraging spending and borrowing. But inflation also reduces incentives to save, so the effect on savings and investments is negative. High or unpredictable inflation rates are regarded as bad.

Following are effects of inflation on individual, organizations and government:

  • Redistribution of wealth:
  • Inflation redistributes wealth from those on fixed incomes, such as pensioners, and shifts it to those who do not have a fixed income (income which takes into account cost of living), for example from wages and profits which may keep pace with inflation.
  • Individuals who are indebted in any way may be helped by inflation because of decrease in the real value of debt. As such, inflation siphons off wealth from those who lend to those who borrow.
  • Income tax brackets tend to become distorted. Governments that allow inflation to rise sharply are, in effect, allowing a tax increase because the same real purchasing power is being taxed at a higher rate.
  • Distorted Economic Decisions: If there is higher inflation, manufacturers that do not adjust their prices will have much lower prices relative to firms that adjust them. This will distort economic decisions. For eg: suppose iron ore prices rise while steel prices do not then steel manufacturers might want to buy steel available through other sellers rather than manufacturing themselves.
  • Rising inflation prompts workers to demand higher wages, to keep up with prices. Rising wages cause more money supply in the market which helps inflation rise. This can cause a spiral in wage and inflation.

Causes Of Inflation

December 2nd, 2009 Comments off

Causes Of Inflation Inflation is a monetary phenomenon .It is also affected by the fluctuations of wages, prices and interest rates. There are two schools of thought which define the causes of inflation. In monetarist school of thought, the availability of money in the market causes rise in prices of goods and services and prices and wages adjust quickly to make other factors merely marginal. In the Keynesian view, prices of goods and wages adjust at their own rates, which fluctuate real output.

There are three major types of inflation:

  • Demand-pull inflation: Here inflation is supposed to be caused by increases in aggregate demand due to availability of excess money which can be because of increased private and government spending, etc.
  • Cost-push inflation: It is caused by drops in aggregate supply due to increased prices of inputs. For eg: a sudden decrease in the supply of oil, which would increase oil prices. Manufacturers for whom oil is a part of their costs will then pass this on to consumers in the form of increased prices.
  • Built-in inflation: It is induced by expectations, inked to the “price/wage spiral” because it consists of workers trying to keep their wages up with prices and then employers passing higher costs on to consumers as higher prices .This forms a “vicious cycle.”

According to Monetarists inflation is caused by an increase in the amount of money in market relative to the capability of the economy to supply. This happens when governments finance spending in a crisis, such as a civil war, by printing money excessively, often leading to hyperinflation, a condition where prices can double in a month or less. The current rise in inflation all over the world is said to be because of this theory. To subvert the possibility of a sub prime crisis the Federal Reserve (Central Bank Of the U.S.) is printing excessive money and introducing large supply of cash in the market. This excessive supply is being used by people to buy more goods. This results in rise in demand of the goods thereby increasing their prices.