InflationInflationBy Umar AzamBy Umar Azam

Inflation Inflation is a Inflation is a Rise in the General Price Rise in the General Price

Level of goods Level of goods and services in an and services in an economy over a period of time. economy over a period of time.

When the price level rises, each unit of When the price level rises, each unit of currency buys fewer goods and services currency buys fewer goods and services i.e. the Value of Money falls. i.e. the Value of Money falls.

A chief measure of price inflation is the A chief measure of price inflation is the inflation rateinflation rate..

1. CREEPING INFLATION (0%-3%)1. CREEPING INFLATION (0%-3%)

2. WALKING INFLATION (3% - 7%)2. WALKING INFLATION (3% - 7%)

3. RUNNING INFLATION3. RUNNING INFLATION (10% - 20%) (10% - 20%)

4. HYPER INFLATION4. HYPER INFLATION (20% & (20% & above)above)

STAGES OF INFLATION

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Types of Inflation

1. Demand Pull Inflation1. Demand Pull Inflation

2. Cost Push Inflation2. Cost Push Inflation

What’s the What’s the differencedifference??

The difference between these two The difference between these two types of inflation is found in their types of inflation is found in their

causes.causes.

Both have the same effects Both have the same effects (increasing price level), but they are (increasing price level), but they are

caused by different things.caused by different things.

Causes of Inflation

Aggregate supply Aggregate supply is the total volume of goods and is the total volume of goods and

services produced by an services produced by an economy of a country at a given economy of a country at a given

price level.price level.

Aggregate demand Aggregate demand is the total volume of goods and is the total volume of goods and

services demanded by the services demanded by the country.country.

Basic Terms:Basic Terms:

Demand-Pull Inflation

Demand-pull inflation occurs when the level Demand-pull inflation occurs when the level of of aggregate demand increases aggregate demand increases faster faster

than the underlying level of supply.than the underlying level of supply.

When the people as a whole get more When the people as a whole get more money they are able to pay more for goods money they are able to pay more for goods

and services (unless more goods and and services (unless more goods and services are produced)services are produced)

"too much money chasing too few goods""too much money chasing too few goods"

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ce level /

inflati

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ce level /

inflati

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Output / employmentOutput / employment

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Demand-Pull Inflation curveDemand-Pull Inflation curve

when there is a rightward shift in the when there is a rightward shift in the demand curve we say that its demand demand curve we say that its demand pull inflation.pull inflation.

QQ11 QQ22

PP11

PP22

Rightward shiftRightward shift

Factors for Increase in Factors for Increase in Demand Demand

Increase in Money SupplyIncrease in Money SupplyReduction in TaxesReduction in TaxesRepayment of Past Internal DebtRepayment of Past Internal DebtIncrease in ExportsIncrease in ExportsIncrease in IncomeIncrease in IncomeDepreciation of local exchange Depreciation of local exchange

ratesrates

Cost-Push InflationCost-push inflation occurs when there is a Cost-push inflation occurs when there is a

decrease/disruption in the decrease/disruption in the aggregate aggregate supplysupply of goods and services due to of goods and services due to increase in the cost of production.increase in the cost of production.

Cost-push inflation basically means that Cost-push inflation basically means that prices have been "pushed up" by increases prices have been "pushed up" by increases

in costs of any of the four factors of in costs of any of the four factors of production (labor, capital, land or production (labor, capital, land or

entrepreneurship)entrepreneurship)

Cost-Push Inflation curveCost-Push Inflation curve

When there is a shift in the supply curve When there is a shift in the supply curve backwards we say that inflation is cost pushbackwards we say that inflation is cost push

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ce level /

inflati

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Pri

ce level /

inflati

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Output / employmentOutput / employment

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AS1

QQ11QQ22

PP11

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backward shiftbackward shift

Stagflation

When rise in price level and fall in When rise in price level and fall in employment occurs employment occurs

simultaneously, then it is called simultaneously, then it is called stagflationstagflation..

It is the worst type of inflation.It is the worst type of inflation.

Factors for Increase in CostFactors for Increase in Cost

Increase in cost of raw Increase in cost of raw materialsmaterials

Increase in TaxesIncrease in Taxes Increase in Rent, Wages, BillsIncrease in Rent, Wages, Bills Shortage of suppliesShortage of supplies Natural calamitiesNatural calamities Increase in exportsIncrease in exports

Effects of InflationEffects of Inflation

Inflation can have Inflation can have PositivePositive and and NegativeNegative

effects on an economy.effects on an economy.

Negative effects: Negative effects: 1.1.Loss in stability in the real value of money. Loss in stability in the real value of money.

2.2.Uncertainty about future inflation may discourage Uncertainty about future inflation may discourage

investment and saving.investment and saving.

3.3.High inflation may lead to High inflation may lead to shortages of goods shortages of goods if if

consumers begin consumers begin hoardinghoarding out of concern that prices out of concern that prices

will increase in the future. will increase in the future.

Positive effects:Positive effects:1.1.Mitigation of economic recessions.Mitigation of economic recessions.

2.2.Debt relief by reducing the real level of debt.Debt relief by reducing the real level of debt.

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