DMPQ: What do you understand by the term inflation? What are the causes of inflation? List down the tools to curb inflation?

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Inflation is defined as a sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change.

  1. Increase in money supply:

In the last few years rate of supply of money is very high i.e. near about 15-18% but the national output is hovering around 6-7% and hence it is creating imbalance and excess money is not being absorbed resulting in inflation.

 

  1. Deficit financing:

When government’s expenditure is way greater than revenue it resorts to financing which also lead to inflation. VI and VII year plan had huge deficit financing resulting in inflation.         

  1. Increase in government expenditure:

When government expenditure is not going into capital formation and instead for consumption it leads to inflationary tendencies.

  1. Inadequate agricultural and industrial growth:

Agriculture growth rate is not in proportion with the demand. Because of the increase in the disposable income people are moving towards high nutritional food like milk, fish, egg etc. But their production is unable to meet consumer demands resulting in inflation.

5. Rise in administered prices:

More administered price will lead to high inflation.

6. Rising import prices:

Inflation has been a global phenomenon. International inflation gets imported into the country through major imports like fertilisers, edible oil, steel, cement, chemicals, and machinery. Increase in the import price of petroleum has been most spectacular and its contribution to domestic price rise is very high.

Modest inflation is not at all bad for economy. But hyper inflation for sustained period kills the effective growth. It hurts the poor most. But inflation can be controlled by adopting following tools :

Tools to control inflation are:

  • Tight Monetary policy
  • Fiscal Policy: efficient taxation system
  • Supply-side policies– policies to increase competitiveness and efficiency of the economy, putting downward pressure on long-term costs.
  • Wage controls
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