Tag: Economy Notes

INFLATION Definition: Persistent rise in the price of goods and services (G&S). Types of Inflation: Creeping Inflation: General price increase up to 4% a year; considered a welcome inflation. Trotting or Walking Inflation: Price increase by a few hundred basis points beyond creeping inflation. Galloping Inflation: Price increase at 8-10% annually. Runaway Inflation: Rapid and uncontrollable price rise. Hyperinflation: Monthly price increase of 20-30%, with no tendency toward equilibrium. Other Concepts: Deflation: Fall in prices; can lead to a self-reinforcing deflationary spiral if unchecked, requiring Keynesian stimulus. Disinflation: Reduced rate of inflation. Stagflation: Combination of inflation and unemployment. Reflation: Deliberate government action to stimulate the economy, often when inflation returns after deflation and recession. Skewflation: Price rise of a small group of commodities over a sustained period. Headline Inflation: Measured using the Consumer Price Index (CPI). Reflects inflation experienced by consumers and includes primary, fuel, and manufacturing inflation. Core or Underlying Inflation: Excludes transitory effects to focus on demand-side factors. Excludes food, fuel, and food processing manufacturing. RECESSION Definition: Decline in macroeconomic indicators with rising unemployment. Technical Definition: Negative growth rate for two consecutive quarters. Double-Dip Recession: A recession followed by a short recovery, then another recession. DEPRESSION Definition: An extreme form of recession. Characteristics: Prolonged duration. High unemployment. Credit unavailability. Shrinking output. Bankruptcies. Reduced trade volume. High currency volatility. Types of Inflation Based on Causes Demand-Pull Inflation: Occurs when demand outpaces supply or there’s an inverse relationship between the two. Cost-Push Inflation: Results from supply shocks, such as increased input costs. Structural Inflation: Arises from deficiencies in the economy, like backward agriculture or inefficient distribution. Cartelization: Producers collude to push prices up. Hoarding: Accumulation of large quantities of goods. Imported Inflation: High import prices due to overdependency on imports. Impact of High Inflation Investment: Short Run: Boosts investment due to: High inflation → High demand → Entrepreneurs expand production levels. Higher inflation reduces the real cost of loans, encouraging borrowing. Savings: Short Run: Savings may increase. Long Run: Savings decrease as inflation erodes purchasing power. Bracket Creep: Nominal value of gross tax revenue increases as taxpayers move into higher tax brackets without real income growth. Exchange Rates: Inflation often leads to currency depreciation. Trade Balance: Developed Economies: Inflation may improve the trade balance. Developing Economies: Inflation worsens the trade balance due to the composition of foreign trade. Employment: Short Run: Employment rises as demand increases. Long Run: Employment may decrease or become neutral. Wages: Nominal Wages: Increase. Real Wages: Fall, negatively affecting purchasing power and living standards. Banking System: Faces pressure from higher lending. Banks often do not revise nominal interest rates quickly, as the real cost of borrowing (Nominal Interest - Inflation) falls. Notes: Nominal Interest Rate: Actual price paid by borrowers to lenders, not adjusted for inflation. Real Interest Rate: Adjusted for inflation (Nominal Interest - Inflation). Gainers vs. Losers During High Inflation GainersLosersDebtorsCreditorsProducersConsumersFlexible income groupsFixed income groupsBond issuersBond holdersDebenture holders or savers with fixed interest rates (gain only if interest > inflation). Monetary Policy Framework Agreement (2015) RBI targets CPI (Combined) inflation within 4% ± 2%. Inflation targeting: Government of India (GoI) sets the inflation target in consultation with RBI. RBI is responsible for achieving the target. Urjit Patel Committee Recommendations (2014) Set the inflation target at 4% ± 2%. Define the nominal anchor in terms of Headline CPI. Ensure fiscal deficit is reduced to 3% by 2016-17. Establish the Monetary Policy Committee (MPC) for decision-making. RBI to independently fix the inflation target. Monetary Policy Committee (MPC) Introduced under the Monetary Policy Framework Agreement (2015). Finance Act 2016: Amended the RBI Act, 1934, providing statutory backing to the MPC. Composition: Governor of RBI (Chairperson). Deputy Governor in charge of monetary policy. One RBI official. Three members nominated by the Central Government. Key Features: Members are not eligible for reappointment. Decisions are binding on RBI. Publishes a Monetary Policy Report every six months. Meets four times a year. Indices for Calculation of Inflation 1. Wholesale Price Index (WPI) Definition: Measures inflation at the wholesale transaction level for the economy as a whole. Published By: Economic Advisor, DIPP, Ministry of Commerce, on a monthly basis with a one-month lag. Commodities Categories: Primary Articles Fuel and Power Manufactured Goods Limitations: Does not include services and the unorganized sector. New All-India WPI: Base Year: 2011-12. Excludes indirect taxes to eliminate the impact of fiscal policy, making it closer to the Producer Price Index (PPI) and reflecting production-side inflation. Introduced a separate WPI Food Index, combining food articles under primary articles and food products under manufactured products. 2. Producer Price Index (PPI) Definition: Measures the price received by producers for their goods. Development: 2014: Goldar Committee set up to develop PPI. 2019: Government commission established to transition from WPI to PPI as the deflator in GVA/GDP calculations. 3. Consumer Price Index (CPI) Definition: Tracks changes in the price of a basket of goods and services purchased by households. Published By: Ministry of Labour: CPI for Industrial Workers (IW) and Rural Labourers (RL). CSO: CPI (Urban, Rural, Combined). base year 2012 Components: Consumer Price Index has 6 main components with differing weights Food and beverages (45% weight overall with Cereals accounting for 9.67% of the total) Pan, tobacco, and intoxicants (2.38%) Clothing and footwear(6.53%) Housing (10.07%) Fuel and light (6.84%) Miscellaneous (services such as education, health care etc.) (28.32%) 4. Consumer Food Price Index (CFPI) Definition: Measures changes in the retail prices of food products. Introduced By: CSO at the all-India level in 2014. 5. Services and Price Index (SPI) Committee: Established by DIPP on the advice of C.P. Chandrashekhar. 6. Housing Price Index (HPI) Published By: RBI. Frequency: Quarterly. Coverage: Tracks housing price changes across 10 major cities. 7. Index of Industrial Production (IIP) Definition: Measures industrial growth and assists in estimating GDP growth. Industry Classification: Manufacturing (77%). Mining (14%). Electricity (7%). Published By: CSO on a monthly basis. 8. Purchasing Manager’s Index (PMI) Definition: Predicts levels of industrial production in advance, covering both manufacturing and services. Published By: HSBC and Markit (Nikkei). Interpretation: Above 50: Expansion in industrial production. Below 50: Contraction in industrial production.

Tag: Economy Notes

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