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BASICS OF INFLATION:

"Inflation is the overall or specific increase in the cost of a good or service."
Thank you, Mr. Dictionary.

Inflation is when your mom or dad complains about the prices they have to pay nowadays compared to what they paid when they were a younger.

Today, the biggest concern facing the country is rising prices. There is uproar in Parliament as the aam aadmi is worst hit by skyrocketing prices.

Inflation's effects on an economy are various

Negative Effects:

1. Decrease in the real value of money

2. Discourage investment and savings, slowing down of growth

3. Shortages of goods

Positive effects

Central banks can adjust nominal interest rates and encourage investment in non-monetary capital projects.

Reasons For Inflation:

Economists attribute inflation to a demand-pull theory. According to this, if there is a huge demand for products in all sectors, it results in a shortage of goods. Thus prices of commodities shoot up.

Another reason for inflation is the cost-push theory. It says that labour groups also trigger inflation. When wages for labourers are increased, producers raise the prices of products to make up for salary hike.

Economists generally agree that high rates of inflation, are caused by an excessive growth of the money supply, fluctuations in real demand for goods and services

Today, most mainstream economists favor a low, steady rate of inflation.

The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates.

Inflation - India

India’s headline inflation climbed to 9.78% in August from a year ago, and has hovered over 9% in the past many months, despite the RBI raising rates a dozen times in the last 18 months.

India is not the only country that has gone down with the concerns of inflation.

Similar concerns are being shared by other Asian economies such as China, Indonesia and Thailand.

For many emerging nations that boast enviable rates of growth, there is a cautionary tale in India, which is paying the price for letting inflation infect its economy.

Reserve Bank of India, is regularly meeting to decide whether to edge up its benchmark interest rate in the continuing tug-of-war between rising inflation and sliding growth.

Policy makers could lift rates to snuff out inflation, but they risk plunging decelerating economies into a serious slowdown.

Inflation in September 2011 in India is termed as “grave” by finance minister Pranab Mukherjee

1. Food inflation-                           9.13%

2. Non-food articles,                     12.89%

3. Fuel and power                           14.69%

Experts said the food inflation may decline only later this year.

KASSA India director Siddharth Shankar said, “Global slowdown and RBI’s tight monetary policy will keep a cap on the non-food inflation numbers.”

The RBI has already hiked policy rates 12 times since March, 2010, to tame demand and curb inflation.

Near double-digit inflation, far exceeding official forecasts, has forced the Reserve Bank of India (RBI) to continue raising rates even as growth slows and developed economies sink deeper into fiscal problems.

What contributed to inflation?

The Greek economy is about to collapse, others are teetering on the brink, the euro is stumbling into the valley of death, the rupee is tumbling against the dollar, making imports –most significantly, of oil—costlier, which will certainly raise prices.

What is the government doing?

The policy paralysis that has affected the Indian government over the last two years is astonishing by any measure.

All that one can make of the UPA is that it desperately wants to win the next general elections. Which, it has decided, entails announcing massive social sector schemes.

Have those schemes worked? No. Forget the endemic corruption you can’t even reach the minimum monthly earnings to a day labourer under the MNREGA scheme in large parts of India, for the simple reason that the roads to and from his village exist only on paper.

Our basic infrastructure is still in shambles, our power sector remains essentially a hungry parasite on our honest incomes, 40 per cent of our food still rots on the way to market—and these facts have been mentioned and reported endlessly and not changed a whit in the last 20 years. But a clueless paralysis cannot know shame.

What it surely realizes is that Government will not be able to meet its fiscal deficit targets (which will only stoke inflation), that it will not be able to raise Rs. 40,000 crore through disinvestment in this financial year, that it does not have the money to spend what is needed in the infrastructure sector, and that its strategy to get prices down will get nowhere

Impact of Inflation

Its rightly said by Subbarao (RBI Governor) High Inflation will hurt growth.

What should be done?

Management of inflation has to be a globally coordinated effort.

The main reason why India, China and many other countries are facing high inflation is because USA is printing lot of dollars. Raising interest rate or raising bank reserve ratios does not solve this root problem,

One way to reduce inflation significantly in these countries is to allow the local currency to strengthen. If India strengthens the Indian rupee by 20%, inflation would fall.

Inflation benefits the debtors. Indian government is the biggest debtor in the country. Is the government really interested in reducing inflation?

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