INFLATION

Inflation

Inflation is an Economic theory where prices of goods, commodities and services go up over the time. Inflation decreases the worth of money. In India, Inflation is calculated through Wholesale Price Index (WPI) which is created by Central Statistical Organization. It consists of all the important goods traded in the wholesale market. There are two main types of inflation:

·         Demand pull inflation - this occurs when the economy grows quickly and starts to ‘overheat’ where Aggregate demand (AD) will increase faster than Aggregate supply (AS).

·        Cost push inflation - It occurs when there is an increase in the cost of production of goods and commodities.

Increase in demand and decrease in supply leads to inflation. The two main factors responsible for inflation are:

·         Demand Factor – it occurs in a condition where the aggregate demand in the economy has exceeded the aggregate supply. Therefore, due to scarcity in supply the price of the commodity rises.

·         Supply Factor – it is an important factor responsible for inflationary pressure in India. The high cost of labor eventually increases the production cost and leads to a high price for the commodity. The damage in transport of goods creates a scarcity, resulting in price hike.

Inflation is a rise in the price level of goods and services. People staying below poverty line have to struggle to fulfill their basic requirements. Due to which, some have to starve for many days. As a result, children below poverty line are malnourished. Whereas, people belonging to the middle-class families start planning how they can cope up with their monthly expenditures, with limited wages and rising prices of goods such as milk, vegetables etc.

Therefore, to sum it all up, inflation decreases the worth of the money severely. Inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand. Hence, inflation can be controlled by increasing the supply in order to control aggregate demand.