Info Nuggets
Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of a currency. It is typically measured by the Consumer Price Index (CPI) or Wholesale Price Index (WPI). Inflation can be caused by demand-pull, cost-push, or structural factors and has significant economic impacts, affecting both consumers and businesses. Managing inflation is crucial for maintaining economic stability.
Core inflation refers to the rate of inflation excluding the prices of food and energy items, which are typically more volatile. By excluding these items, core inflation provides a clearer view of long-term inflation trends and underlying price pressures in an economy. It is often used by policymakers to make informed decisions regarding monetary policy and economic stability.
Headline inflation is the measure of the total inflation within an economy, including all goods and services, such as food and energy, whose prices tend to be more volatile. It reflects the overall price changes that consumers face and is commonly reported in news outlets, unlike core inflation, which excludes volatile items.
Stagflation refers to an economic condition where high inflation and unemployment occur simultaneously, along with stagnant demand and economic growth. It presents a challenge for policymakers, as measures to control inflation (e.g., higher interest rates) can worsen unemployment, while strategies to reduce unemployment can fuel inflation.
GDP deflator is a price index that measures the change in the prices of all goods and services included in a country’s GDP. It reflects the difference between nominal GDP (calculated at current prices) and real GDP (calculated at constant prices), helping to determine inflation levels in the economy.
How Central Bank controls inflation?
The Reserve Bank of India (RBI) controls inflation through monetary policy tools like adjusting the repo rate (borrowing cost), reverse repo rate, and cash reserve ratio (CRR). It also conducts open market operations (OMOs) to manage liquidity. By targeting inflation (around 4%), the RBI stabilises prices, influences demand and supply, and ensures economic stability, fostering sustainable growth while controlling price volatility and inflation expectations.
Role of government in controlling inflation?
The limitations of monetary measures in controlling inflation may prompt the governmentto usefiscal measures. While monetary policy primarily focuses on controlling the money supply and adjusting interest rates, these tools may not always address inflationary pressures effectively.Fiscal measures, such as adjusting taxation, managing government spending, and regulating public borrowings, can directly influence aggregate demand and enhance supply-side growth, making them crucial for long-term inflation control. Tax hikes can reduce consumer spending, while government spending can stimulate production and boost supply, helping stabilise prices.
How inflation affects economy?
Inflation erodes the purchasing power of money, leading to higher prices for goods and services. It affects the economy by reducing consumer spending and investment, creating uncertainty. As inflation rises, the value of the currency falls, making imports costlier, which worsens the trade balance. High inflation can destabilise financial markets, increase interest rates, and reduce economic growth, impacting both businesses and consumers. Effective inflation control is crucial for maintaining economic stability.
Is controlled inflation beneficial for the economy?
Moderate inflation can be beneficial for the economy, encouraging spending and investment, which drives growth. It also helps reduce the real value of debt. However, high inflation erodes purchasing power, increases uncertainty, and negatively impacts savings and fixed incomes. Thus, controlled inflation is crucial for economic stability.
