This document discusses various topics related to inflation including:
- Definitions of inflation and general price levels
- Types of inflation such as anticipated, unanticipated, walking, and galloping inflation
- Parties affected by inflation such as families receiving subsidies, investors, and debtors
- Causes of inflation including demand-pull and cost-push inflation
- Policies to reduce inflation such as monetary and fiscal policies
- Methods of calculating and measuring inflation including price indices, absolute prices, and comparative prices
3. 3
What is inflation?
The continuous rise in the general
price levels in the economy over a
period of time could be simply
termed as “inflation”.
Inflation is defined as a sustained
increase in the general level of
prices for goods and services.
4. General price levels
The general price level is a
hypothetical daily measure of overall
prices for some set of goods and
services (the consumer basket), in
an economy or monetary union during
a given interval (generally one day)
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5. 5
Anticipated inflation
In this case people anticipate or
forecast that future prices would
rise or go up resulting inflation hence
necessary precautionary steps or
actions are taken at present.
However, all these precautionary
measures would be temporary
solutions for inflation
These temporary solutions are
termed as “indexation”
6. 6
Indexation
This is a temporary solution taken by
people in situations of inflation
Here people try to influence for the
changes in real variables such as
taxation, wages, interest rates etc
in order to net off negative effects
of inflation
8. 8
Moderate-inflation less than 10%
Double digit inflation-10%-99%
Hyper inflation/3 digit inflation-inflation
more than 100%
Creeping/mild inflation- a small rise over a long
period of time
Stagflation- very high inflation, unemployment,
negative growth
Suppressed inflation- inflation that is
controlled by the government
Types of inflation
9. 9
Core inflation- inflation rate calculated
excluding food and energy items from NCCPI
Structural inflation- inflation built into an
economy due to the governments monetary
policy
Deflation- decrease in GPL over a period of
time
Disinflation- is the slow down of the inflation
rate being a positive figure
Types of inflation
10. 10
Walking inflation- This type of strong, or
pernicious, inflation is between 3-10% a year.
It is harmful to the economy because it
heats up economic growth too fast. People
start to buy more than they need, just to
avoid tomorrow's much higher prices. This
drives demand even further, so that suppliers
can't keep up.
Types of inflation
11. 11
Galloping inflation- When inflation rises to
ten percent or greater, it wreaks absolute
havoc on the economy. Money loses value so
fast that business and employee income can't
keep up with costs and prices. Foreign
investors avoid the country, depriving it of
needed capital. The economy becomes
unstable, and government leaders lose
credibility.
Types of inflation
12. 12
A family who is receiving a subsidy in
kind- positively
A family who is receiving a subsidy in
monetary terms- negatively
An investor- positively
An interest owner from a bank
deposit- negatively
Debtor- positively
Creditor- negatively
Parties affected by inflation
13. 13
Importer- positively
Exporter- negatively
Savings- negatively
Investments- negatively
Fixed income earners- negatively
Variable income earners- positively
Parties affected by inflation
14. 14
Shoe-leather costs
Menu costs
Confusion costs
Psychological costs/political costs
Unemployment or negative growth
Foreign investments being less
attractive
Fall of exports
High income disparity
Costs of inflation
22. 22
Monetary policy- increase in interest
rates
Savings increase, investment decrease,
consumption decrease
Fiscal policy- decrease government
expenditure, increase taxes
Consumption decrease, government
expenditure decrease
Supply side policies
Producers are given subsidies, costs of
production reduces
23. 23
Price indices are used to calculate
price levels or inflation
It is important to study on absolute
prices and comparative prices in this
context
Calculating or measuring
inflation
25. 25
Comparative prices
Comparing the changes in price of a
commodity to another commodity
This helps to identify the resource
allocation
26. 26
Price index
What is a price index?
Average prices of a basket of selected
goods and services in a present period
of time compared with a price of a
base year could be simply termed as a
price index
28. 28
GDP deflator or implicit
price index
(Nominal GDP/real GDP) x 100
(constant price GDP/current price
GDP) x 100
29. 29
Wholesale price index
This is prepared by CBSL to measure
changes in prices at the primary
sales level
30. 30
Colombo consumers price
index
Basis CCPI(N)
Base year
Coverage
Target household units
Size of household unit
Total number of items
Price collection centers
2006/07=100
All urban divisions in Colombo
district
All households in Colombo district
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