Inflation: The term ‘inflation’ refers to the general level at which prices continue to rise.
Other: Rising prices of some commodities do not make inflation. High prices for most goods and services are referred to as inflation.
Desirable: In general, inflation is closely related to economic growth and is desirable.
Measurements: In India, inflation is calculated on the basis of the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). These indices are determined by the average price of the selected goods and services.
Percentage: Although calculated in numbers, inflation is expressed as a percentage.
Base year: Inflation is measured based on the previous year. On a weekly basis, inflation is determined in comparison to the previous week.
Types of Inflation: Inflation due to market demand and inflation due to increased cost of production have long been referred to as two major types.
Modern Types: Single-digit inflation is currently classified as creeping inflation, double-digit inflation as inflowing inflation, and short-term inflation as high inflation. High inflation indicates an environment in which the overall confidence in the domestic currency is being eroded. For example, Sri Lanka.
Price stability: Keynes, the economic genius, guided that the main goal of monetary policy is price stability. This theory was adopted as a state policy during the Roosevelt regime in the United States.
Reviews: There are also criticisms of price stability. Criticisms such as monetary policy are not the only cause of inflation, that it will not encourage investment if prices do not rise in the long run, and that this may not be an appropriate policy for countries where foreign exchange plays a major role.
Monetary control tools: Monetary policies such as debt control, monetary devaluation and printing of new banknotes are followed to control inflation. The central bank, the Reserve Bank of India, has the monetary policy powers and responsibilities.
Financial Control Tools: Government fiscal controls include reducing government spending, increasing direct taxation, reducing indirect taxation, and adhering to a surplus budget.
Debt control: (Credit control) If the central bank realizes that inflation is on the rise, the bank raises interest rates. Thus, borrowers do not come forward to borrow at higher interest rates. As a result, demand for goods decreases and their prices fall.
Bank interest rate: (Bank Rate) The interest rate at which the Reserve Bank of India lends to commercial banks against their securities is called the bank interest rate.
Open market activities: (Open market operations) The central bank sells government debt securities during inflation. The cash reserves of the commercial banks that buy it are declining; Thus, the amount of credit available to the public is reduced.
Cash flow: (Deflation) This is the opposite of inflation. Very rarely occurring. This is not desirable from the point of view of economic growth. The central bank lowers bank interest rates if liquidity declines. Borrowers are increasing their investment. As a result, employment and people’s incomes increase.