Inflation in depth

1. Inflation
Causes, Effects and Unemployment

2. Overview
Inflation is an important economic concept that affects
us all in many ways, from the prices we pay for everyday
goods and services to the value of our investments and
savings. In this presentation, we will explore what
inflation is, how it is measured, and what causes it.
Presented By
- Ankit Jain (2020BTCSE004)
- Ritvik Shukla (2020BTCSE023)

3. What is Inflation?
Inflation refers to the substantial and rapid increase
in the general price level. It cause decline in
purchasing power and the value of money.
In layman terms inflation is when things cost more
money than they used to. This means that the same
amount of money can buy less than it could before.

4. “Inflation is a state in which the
value of money is falling i.e.
prices are rising”
- Geoffrey Crowther

5. Characteristics Of Inflation
Increase in Prices Decrease in Purchasing Power
Inflation is characterized by an
increase in the overall price
level of goods and services in
an economy.
Inflation reduces the purchasing power of
currency, meaning that the same amount
of money can buy fewer goods and
services.

6. Characteristics Of Inflation
Persistent Measurable
Inflation is not a one-time event
but rather a sustained increase
in prices over a period of time.
Inflation can be measured using various
indices, such as the Consumer Price
Index (CPI) or Producer Price Index (PPI).

7. Consumer Price Index (CPI)
The CPI, or Consumer Price Index, is a measure of the average
change over time in the prices paid by consumers for a basket of
goods and services.
It is used to track inflation and is calculated by comparing the prices
of a fixed basket of goods and services from year to year.
A higher CPI indicates that prices are increasing, while a lower CPI
indicates that prices are decreasing or remaining stable.

8. Producer Price Index (PPI)
The PPI, or Producer Price Index, is a measure of the average change over
time in the selling prices received by domestic producers for their goods
and services.
It is used to track inflation and is calculated by comparing the prices
received by producers for a fixed basket of goods and services from year
to year.
A higher PPI indicates that prices are increasing, while a lower PPI
indicates that prices are decreasing or remaining stable.

9. Causes of Inflation
● Increase in Public Expenditure
● Increase in Private Expenditure
● Increase in Exports
● Reduction in Taxation
● Repayment of Public Debt
● Rapid Growth of Population
Increase in Demand

10. Causes of Inflation
● Shortage of Supply of Factors
● Hoarding by Traders
● Hoarding by Consumers
Decrease in Supply

11. Types of Inflation
● Creeping Inflation (<3%)
● Walking Inflation (3%-4%)
● Galloping Inflation (>=10%)
● Hyperinflation (100%)
On the basis of Rate of Rise in Price

12. Types of Inflation
Demand Pull Inflation
When the aggregate demand in an economy strongly outweighs
the aggregate supply the prices go up.
When overall prices increase due to the increases in the cost of wages
and raw materials.
Cost Push Inflation

13. Types of Inflation
Stagflation
● Persistence rise in Price
● Unemployment
● No Consumer
● Decrease in the price of goods and services
● Due to the reduced money supply, demand decreases hence the
price is also reduced
Deflation

14. Effects Of Inflation
Reduced savings Redistribution of wealth
Inflation can reduce the value
of savings, which discourages
people from saving money and
encourages them to spend
more.
Inflation can cause a redistribution of
wealth from those on fixed incomes, such
as pensioners, to those who can increase
their income, such as property owners.

15. Effects Of Inflation
Wage-Price spiral Uncertainty
Inflation can lead to a
wage-price spiral, where
workers demand higher wages
to keep up with the rising cost
and businesses increase prices
to cover the labor costs, that
leads to higher inflation.
Inflation can create uncertainty in the
economy, making it difficult for
businesses to plan for the future and
causing investors to be more cautious.

16. Phillips Curve (A.W. Phillips)

17. Phillips Curve (A.W. Phillips)
Phillips Curve shows that when unemployment is low, inflation tends to be high,
and when unemployment is high, inflation tends to be low.
This is because when the economy is operating at full capacity with low
unemployment, businesses have to compete for workers, which drives up wages
and leads to higher costs of production.
These higher costs are then passed on to consumers in the form of higher prices,
causing inflation.
When there is high unemployment, businesses have less competition for workers,
which means they do not have to raise wages to attract employees. This leads to
lower costs of production, which can result in lower prices and lower inflation.

18. Measures to curb Inflation
● Central banks can control inflation by implementing monetary policies
such as increasing interest rates, which reduces the amount of money in
circulation, thus helps to reduce inflation.
● Governments can control inflation by implementing policies such as
reducing government spending or increasing taxes
● Governments can also implement wage and price controls to control
inflation. These policies limit the amount of money that companies can
charge for goods and services and limit the amount of money that
employees can be paid.

19. Keynesian Theory
● Keynesian theory is an economic theory developed by
British economist John Maynard Keynes.
● According to the Keynesian theory, the government can
influence the level of economic activity by adjusting its
spending and taxation policies. During periods of
economic downturn, the government can increase its
spending to stimulate demand and create jobs. This
increase in demand, in turn, encourages businesses to
produce more and hire more workers, which further
stimulates the economy.

20. Keynesian Theory
Keynesian theory also supports the use of
monetary policy by central banks to control interest
rates and the money supply. By lowering interest
rates, central banks can encourage borrowing and
spending, which can stimulate the economy.

21. Multiplier Effect - Keynesian
One of the key principles of Keynesian theory is the
idea of the "multiplier effect." This principle
suggests that every dollar spent by the government
can generate more than one dollar of economic
activity, as the money circulates through the
economy and creates additional demand.

22. 1970- A case study of Stagflation
● The stagflation of the 1970s was a period of economic uncertainty in which
the United States experienced both high inflation and stagnant economic
growth.
● The primary cause of the 1970s stagflation was a confluence of events,
including rising oil prices and the Vietnam War. The oil embargo imposed by
OPEC in 1973 led to a sharp increase in the price of oil, which in turn led to
higher production costs for many businesses. This, combined with the costs
of the Vietnam War, contributed to higher inflation.

23. 1970- A case study of Stagflation
Stagflation, 1965-1985

24. 1970- A case study of Stagflation
At that time, the economy was experiencing stagnation, with low productivity growth and high
unemployment. Traditional economic policies were not effective in addressing the problem, as
attempts to stimulate economic growth through increased spending or tax cuts would only
increase inflation.
The stagflation of the 1970s had significant consequences for the economy and led to a shift in
economic thinking. It challenged the prevailing Keynesian economic theory, which had previously
held that government intervention was necessary to stimulate economic growth.
In response, new theories emerged, which emphasized the importance of reducing government
regulation and increasing the role of the market in economic decision-making.
Overall, the stagflation of the 1970s was a difficult period for the U.S. economy and had significant
implications for economic policy and theory.

25. India & Stagflation
India experienced a period of stagflation during the 1970s, similar to the United
States and other countries during the same time period.
The primary cause of stagflation in India was a combination of factors,
including rising oil prices, government deficit spending, and a decline in
agricultural productivity.
The oil crisis of 1973 led to a sharp increase in the price of oil, which in turn led
to higher production costs and increased inflation. The government's deficit
spending also contributed to inflation, as did a decline in agricultural
productivity due to adverse weather conditions.

26. 1991 Indian Economic Crisis
● In 1991, India experienced a severe economic crisis due to a balance of
payments crisis caused by high external debt and low foreign exchange
reserves. High Currency Valuation is also the cause
● In the 1980s, India had borrowed heavily from international lenders, in
part to finance infrastructure projects and industrialization. However, by
1991, the country was facing a severe balance of payments crisis, as it
was unable to service its debt and was running out of foreign exchange
reserves
● The crisis was worsen by the Gulf War and the resulting rise in oil prices,
which further strained India's foreign exchange reserves.

27. External Debt Of India

28. 1991 Indian Economic Crisis
● To address the crisis, the Indian government implemented a series of
economic reforms, including devaluation of the rupee, liberalization of
the economy, and opening up to foreign investment.
● These reforms led to significant changes in India's economic policies and
resulted in increased foreign investment, growth of the private sector, and
a shift towards market-oriented policies.
● The 1991 economic crisis and the subsequent reforms are considered a
turning point in India's economic history and are credited with laying the
foundation for the country's economic growth and development over the
following decades.

29. References Used
Investopedia
Inflation: Prices on the Rise
Inflation: What It Is, How It Can Be Controlled, and
Extreme Examples
Stagflation in the 1970s

30. THANKS!