TOPIC -

What is Inflation?

Submitted to -

Prof.Gurdeepak

Submitted by-

Name- Parul Malhotra

Class- MBA 1

Section- B

Subject- Accounts

INTRODUCTION

Innflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

In recent years, most developed countries have attempted to sustain an inflation rate of 2-3%.

CAUSES OF INFLATION

Demand-Pull Inflation - This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.

Cost-Push Inflation - When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

MEASUREMENT OF INFLATION

Measuring inflation is a difficult problem for government statisticians. To do this, a number of goods that are representative of the economy are put together into what is referred to as a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year.

We can also measure it by –

· Consumer Price Index (CPI) - A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. U.S. CPI data can be found at the Bureau of Labor Statistics.

· Producer Price Indexes (PPI) - A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. U.S. PPI data can be found at the Bureau of Labor Statistics.

INFLATION RATE IN INDIA

The inflation rate in India was last reported at 8.62 percent in June of 2011. From 1969 until 2010, the average inflation rate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes: India Inflation Rate chart, historical data and news.

CONCLUSION

Inflation-indexed securities offer protection against inflation but offer low returns Inflation is a sustained increase in the general level of prices for goods and services.

Ø When inflation goes up, there is a decline in the purchasing power of money.

Ø Variations on inflation include deflation, hyperinflation and stagflation.

Ø Two theories as to the cause of inflation are demand-pull inflation and cost-push inflation.

Ø When there is unanticipated inflation, creditors lose, people on a fixed-income lose, "menu costs" go up, uncertainty reduces spending and exporters aren't as competitive.

Ø Lack of inflation (or deflation) is not necessarily a good thing.

Ø Inflation is measured with a price index.

Ø The two main groups of price indexes that measure inflation are the Consumer Price Index and the Producer Price Indexes.

Ø Interest rates are decided in the U.S. by the Federal Reserve. Inflation plays a large role in the Fed's decisions regarding interest rates.

Ø In the long term, stocks are good protection against inflation.

Ø Inflation is a serious problem for fixed income investors. It's important to understand the difference between nominal interest rates and real interest rates.