Inflation and
Business Cycle
Anila R
Kerala State Civil Service Academy
Terms in Inflation
Inflation: rise in general price level
Deflation : Fall in general price level , low real aggregate growth ,
output and employment
Disinflation : Decrease in rate of inflation
Cost push inflation: Price rise due to factor costs
Demand Pull inflation :Price rise due to increase in demand
Reflation: Increase in expenditure to boost
economy
Stagflation : High unemployment and high
inflation
Skewflation : Skewed inflation /inflation in
selected sectors
Headline inflation: Overall inflation . Supply shock
led inflation . Includes food and fuel inflation
Core inflation/Underline inflation :
Devoid of transitory components of
inflation . No fuel and food inflation .
Trend inflation: Underlying trend in
inflation which can contribute to
core inflation
GDP Price Deflator=(Nominal GDP÷Real GDP)×100
Nominal GDP = GDP at current prices
Real GDP = GDP at base prices
Can show inflation metrics
Inflation Targeting is targeting to contain
consumer inflation to 4 % with a band of (+/-) 2 %
Monetary Policy Committee.
Urijith Patel Committee Report
Price index: average price level
Structural inflation :
• Structural shifts in demand composition
• Structural shift in export receipt
• Growth in population , living standards, and
urbanization contributes demand not met by
bottlenecks in agriculture
• Shifts in foreign exchange led changes .
Inflationary gap and deflationary
Gap
Output gaps: Difference between potential
and actual output at full employment levels
Inflationary gap :Aggregate Demand >
Aggregate Supply
Deflationary gap : Aggregate Demand <
Aggregate Supply
Core inflation
Trend of inflation rate
Reflects the inflation expectations
Represents economic activity
Permanent
Less volatile
Excludes volatile goods from CPI
Seigniorage : Value of money >
Cost of producing money
Seigniorage effect :Government
/ Authority can make profit from
printing money
Inflation Tax / Seigniorage
More deficit Government More
More
of mint more demand
inflation
government money leads to
Inflation spiral / Wage Price
Spiral
Wage
Price Rise
Rise
Wages
Rise
Relation between Interest Rate and
Inflation
Real Nominal
Inflation
interest Interest
Rate
Rate Rate
A.W. Phillips Curve
Inflation
Unemployment
Long run Phillips Curve
Inflation Unemployment
There is no trade-off between inflation and unemployment rate
There exists a series of trade off lines and there is a long run line
In the long run line there is no trade off . This is Natural Rate of
Unemployment . If money illusion is there then there will be
normal tradeoff . If money illusion exists tradeoff will be to ahighe
inflation level at NRU. Non-Accelerating Inflation Rate of
Unemployment is another concept in which at NRU inflation rise
at constant rate
Types of Inflation based on
intensity
Hyperflation (>50% per
month)
Galloping(20-100% and
above but below1000%)
Running inflation (10-20%)
Walking
inflation/Moderate(4-
10%)
Creeping inflation
(1-4 %)
Theoretical premises of
inflation
Cost-push
Demand-
Monetarist
pull
Demand-
Keynesian
shift
inflation
inflation
Implications of Inflation
Wealth distribution
Higher investment
Higher production
Higher Aggregate Demand
Inflation in India
Monetary Policy Framework Agreement on (2015)
Consumer price inflation within 6 % by January 2016 and within
4 % with a band of (+/-) 2 % for all subsequent years.
RBI needs to give explanation to government ,publish operating
targets and procedure and how it will achieve the framework if
• Retail inflation >6 % for 3 consecutive quarters from 2015-16
• Reatil inflation < 2 % for 3 consecutive quarters from 2016-17.
Document explain the sources of inflation and forecast for
inflation for next 6-18 months/ every 6 months
India Specific Reasons
Shifting dietary patterns
Hike in rural wages
Price supports
Social Security Measures
Policy bottlenecks – Supply constraints
Expectations augmented inflation spiral
Inflation rise in
general price Indexation periodic
level adjustment of
money-value
Inflation Indices in India
Wholesale Price Index
Consumer Price Index:
• CPI for Industrial Worker
• CPI for Agricultural Labourers (AL)
• CPI for Rural Labourers (RL)
• CPI for Urban Non-Manual Employees
(UNME).
Prelude of CPI
Bihar (1909-1914 , 1923)
Bombay (1921)
Sholapur ( 1925)
Ahmedabad (1926)
Royal Commission on Labour (1931)
Rau Court of Enquiry ( 1940)
Cost of Living Index Numbers (1941)
Labour Bureau
Minimum Wages Act, 1948
Consumer Price Index Numbers for Agricultural
Labourers(1950-51)
Technical Advisory Committee (1954)
Family living survey (1958-59)
Consumer Price Index Components
Food and beverages
Pan, tobacco and intoxicants
Clothing and footwear
Housing
Fuel and light
Miscellaneous
All Groups
Rural Urban Combined
156.1 161.3 158.0
182.9 188.6 184.4
154.6 148.1 152.0
156.3 156.3
Rural Urban Combined
146.2 137.2
142.8
153.7 146.0
150.0
155.4 154.0
154.7
General measures
Regular Inflation monitoring
Assured Sate intervention against black marketing and hoarding
Systematic review
Higher Minimum Support Prices
Price Stabilization Fund (PSF) for agro product procurement
Specific measures
PSF based disbursement of onions
Utilization of pulses from buffer
Army and Central Para-Military
Forces needs met
WPI
• Consumer Food Price Index (CFPI) is a measure of change in
retail prices of food products consumed by a defined
population group in a given area with reference to a base
year.
CFPI
Subgroups Description Rural Urban Combined
Cereals and
a. 36.71 28.51 34.16
products
Pulses and
b. 6.25 6.11 6.20
products
c. Oils and fats 8.98 9.44 9.13
Egg, fish and
d. 6.50 7.38 6.77
meat
Milk and
e. 16.53 21.59 18.10
products
Condiments and
f. 4.10 3.79 4.00
spices
g. Vegetables 12.64 12.93 12.74
h. Fruits 3.65 6.14 4.43
i. Sugar etc. 4.64 4.11 4.47
Total Weights 100.00 100.00 100.00
Find out
State with highest inflation
State With lowest inflation
State with Highest and lowest CPI
Highest inflation in component wise for CPI
Highest inflation in component wise for WPI
What is recent CFPI
What is inflation target now in India
When did last Monetary Policy Committee met ?
