Wednesday, 17 February 2016

What are the various causes of Inflation in any Country?

Different economists have defined inflation in various ways. In terms of layman language ‘inflation’ is defined as the rapid increase in the general price level. It simply indicates rising prices which cause a decline in the purchasing power of money. Economist Prof.Crowther defined inflation as “Inflation is a state in which the value of money is falling, i.e., prices are rising.” Inflation is always associated with a rise in prices which is continuous and persistent. It is a process of rising prices. It is considered to be a dynamic process which can be observed only over a more or less lengthy period of time. Inflation is an economic phenomenon which originates within the economic system and is fostered by the interaction of economic forces of demand and supply. The excess of demand over the available supply is the hallmark of inflation. It is a condition of economic disequilibrium and is characterized by excessive money supply.

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There are various types of inflation an economy faces like creeping inflation, this occurs when there is a sustained rise in prices over time at a mild rate around 2 to 3 percent per year. It is also known as mild inflation. Walking or trotting inflation happens when there is a rise in inflation of international standard of 3 to 6 percent per annum. When the sustained rise in prices is over 8 percent and around 10 percent per annum, it is known as running inflation. When the rise in prices is 20 to 30 percent or more, it is called hyper inflation. Other types of inflation may include open inflation, suppressed inflation, stay inflation, sporadic inflation and comprehensive inflation.

There are two causes or factors which are responsible for inflationary pressure in India: (1) Demand pull factors (2) Cost push factors. These two factors may operate independently or simultaneously. The factors arising out of demand are called Demand pull factors and those relating to supply are called Cost push factors. In India, both of these have inflationary effects. The Demand Pull factors may include the following:
  • High Rate of Investment: The high investments made by the government and private industrialists have resulted in a continuous increase in the price of capital goods and services thus resulting in inflation.
  • Expenditure of the Government: Tremendous increase in revenue expenditure has lead to an increase in demand for goods but the supply has not increased proportionately, thereby a rise in prices occurs.
  • Growth of Population: The rapid increase in population is also one of the major factors for the rise in the price level. Gradually the demand increases and the supply does not increase hence a rise in the price level.
  • Hoarding and Black Money: Black money means unaccounted money. It is created through tax-evasion and is responsible for price rise. Black money generates hoarding of goods in the economy.
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The Cost Push factors may be described below:

Fluctuations in Output and Supply: The wide fluctuations in the production of food grains have been responsible for price rise. The power breakdowns, strikes and lockouts result in lower production of goods.
Public Distribution System: This results in an uneven distribution of goods and services thus leading to scarcity of goods.
Enhanced Taxation: Every year the government imposes fresh commodity taxes in the budget. This directly affects the price of the goods.

Thus, the Government should take Anti-Inflationary measures to curb the problem of inflation. The government should adopt monetary policy control measures to check inflation. It has also introduced rationing system to ensure proper supply of goods. The rate of increase in money supply should be in proportion to rising in national income. Other anti-inflationary measures may include the reduction in public expenditure, increasing taxes, reduction in deficit financing, control on population growth and many others.

Article by Anisha Dutta
She is a content evangelist who believes that the Science of today is the Technology of tomorrow. 
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