INFLATION
“Inflation can be defined as a sustained increase in the general level of prices for goods and services”
MAJOR TYPES OF INFLATION
Demand Pull Inflation:
This type of inflation occurs when demand exceeds supply primarily due to increased money supply in the economy.
Let’s look at few causes for this type of inflation
•    Increase in money supply
•    Increased Government spending.
•    Increase in Black Money
•    Foreign prices and growth
•    Expectation of Inflation
Cost Push Inflation:
Simply it is the price rise due to increase in the production costs.
Some of the major causes of it are:
•    Increase in wages
•    Business monopoly
•    Government regulation and taxes
•    Exchange rates
•    Rising production costs

BASICS TERMINOLOGIES
Inflation Types
Creeping Inflation: When prices rise at very slow rate, i.e. creeper’s speed, it is called ‘creeping inflation. Generally 3% annual rise in prices is considered as ‘creeping inflation’.
Walking or Trotting Inflation: When inflation is in between 3% to 7%, it’s regarded as ‘walking or trotting inflation’. Some economists have extended the boundary of this type of inflation up to 10% per annum. This type of inflation is considered as a warning signal for the government to take some measures to control the situation.
Running Inflation : This type of inflation comes into action  when there’s a rapid rise in prices and the range of this type lies in between 10% to 20% per annum. This type of inflation is controllable only by strong monetary and fiscal measures, lest it will be turned into ‘hyperinflation’.
Hyperinflation: The rise of prices from 20% to 100 % per annum is regarded as ‘galloping inflation’. OR when price rises to double or triple digit rate.Hyperinflation is extremely fast or out- of-control inflation.
Hyperinflation occurs when price increases are so wild that the concept of inflation is meaningless. Recent example “Inflation in Venezuela” .It’s hard to imagine daily life with an annual inflation rate of 1,000,000%.
At that rate, the price of a cup of coffee doubles between your weekly pay checks. That is what the citizens of Venezuela are facing, according to a recent report from the IMF.
Demand Pull Inflation: This type of inflation is results as an excess demand. In this case supply remains constant (couldn’t be upgraded as per demand). So consequently, the prices go up.
Cost Push Inflation: When there’s increase in money-wages at speedier rate than that of the rise in the productivity of labor, it results as increased cost of production which furthers the increase in prices. This type of inflation is regarded as cost push inflation.
Mixed Inflation: Majority of the economists hold that, inflation  is neither completely ‘demand pull’ nor completely ‘cost push’, the actual inflationary process contains the elements of both. Excess demand and increase in money wages operate at the same time, but it’s not necessary that they start at the same time.
Markup inflation: Garner Akley put forward the theory of ‘markup inflation’. In simple words it is an advanced explanation of ‘Mixed inflation’. According to Akley First comes demand pull inflation, and it is led by cost push inflation. Markup inflation comes to happen when excess demand increases the prices, which stimulates the production. The increasing production creates excessive demand for the factors of production, and the excessive demand for the factors of production further raises the prices.
Stagflation: Stagflation is a situation, whereby economy faces stagnation of output and unemployment along with a high rate of inflation. This situation is also known as ‘inflationary recession’.
Disinflation is a decrease in the rate of inflation. Being how much prices are increasing per unit of time, it can be expressed using the word disinflation: The slowing of the rate of inflation per unit of time.
For example in one month the rate of inflation could be was 4.4% and in May the rate of inflation was 4.0%. In this instance the price of goods and services is still increasing; however, it is increasing at a slower rate, 0.4%less, than a month before. It should not be confused with deflation, which is an overall decrease in prices. Disinflation is generally considered to be a very positive state for the economy. Over the last twenty years
North America has seen steady disinflation, and many credit this with the strong growth during this period. While disinflation is generally perceived as positive, it is not good for the effect to go so far as deflation, which is generally perceived to be a very negative state for an economy.
DEFLATION
Deflation is a decrease in the general price level over a period of time. Deflation is the opposite of inflation. For economists especially, the term has been and is sometimes used to refer to a decrease in the size of the money supply (as a proximate cause of the decrease in the general price level). The latter is now more often referred to as a 'contraction' of the money supply. During deflation the demand for liquidity goes up, in preference to goods or interest. During deflation the purchasing power of money increases. Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods of poor economic growth historically.
Headline Inflation: Consumer Price Index based inflation is called headline inflation
Core Inflation: Core inflation= headline inflation minus food and energy items which are frequently subject to volatile prices.
Reflation : This term is used to refer the situation where measures are taken to curb deflation.
Steps can be like fiscal policy (reducing taxes) or monetary policy (increasing money supply or reducing interest rates)
Slowdown – Recession & Depression: These three terms are inter- linked. Generally, first slowdown occurs, then recession comes and finally depression occurs
a)    Slowdown: A decline in economy of a country – Link it with GDP, not inflation
b)    Recession: If slowdown occurs for 2 successive quarters i.e. GDP falls for 2 successive quarters, it is known as recession. Common indicators are fall in GDP and investments
c)    Depression: Generally, if recession lasts long, it is said that the economy is in depression. Main indicators are huge fall in demand of goods and services with a sharp decline in GDP and investments. Ex: Great Depression of 1930.
Now that you have seen inflation and its forms, you can now see that inflation is not just about raising prices, there is a need to study the causes of inflation which generally have some other root causes and sometimes concerns. These vary a lot depending on situation and can be critical at many circumstances.
Base Effect
The base effect is the distortion in a monthly inflation figure that results from abnormally high or low levels of inflation in the year-ago month. A base effect can make it difficult to accurately assess inflation levels over time. It diminishes over time if inflation levels are relatively constant.
INFLATION – BAD OR GOOD ?
Now the question occurs whether inflation is really bad? Let’s try to answer it:
Deflation and very low inflation – Is it harmful?
Deflation as we have seen is simply fall in prices of goods and services. Or in other words value of money just gets increased during deflation.
Is that necessarily bad? Not always!
If the prices suddenly decrease, there will be more consumption as prices have decreased and hence the demand will again increase, increasing the prices of goods.
What happens if the deflation persists for few periods? Will the consumption increase?
•    If you know that you can buy the same product for a lower price tomorrow, it will discourage you from spending right now.
•    Also if you are in debt, it increases your debt burden, because the same amount which you have borrowed earlier now has far more value, which makes it difficult to repay.
Hence, deflation can reduce the spending power of firms and consumers, more especially in case they are in debts.
But now, you have certain doubts:
When we can buy more things with the same money? What are we losing in deflation?
–    Well, when you have deflation, the following generally take place:
•    lowering of prices
•    lowering of wages and
•    High unemployment.
So, although you could get cheaper products, your disposable income got reduced because of lower wages and unemployment effect. There might be some people who are better-off with deflation, but the problem is wider on a macroscopic view.
Decrease in Price More Consumption High Demand: Increase in Price
So, prolonged deflation is always bad?
–    No, there are few cases where it can be good but it can rarely be observed in this 21ST century. Suppose if there occur continuous technological improvements: Most of the goods could be produced at a lower cost every year and hence prices can fall.
This is definitely a good sign even though there would be a deflation. Also like how it happened with Japan, if most of the neighboring countries are having inflation, then the country with deflation has better competitive advantage as their goods obviously seem cheaper than other countries with inflation.
•    money in the economy remains almost constant
•    Productions will be at constant and
•    Demand will also be at constant.
So, it’s not good for growing economy. Growth be doomed!
Now we understood that having some inflation is good. So, can’t we keep it high so that it will never come near ‘0’?
–    Okay, here we are talking about high Inflation. As you know, inflation makes your money less valuable.

Let’s just look at few of the major consequences of having high inflation:
It erodes the purchasing power of money: As we have seen many times before, inflation makes your monetary assets fall in value. Ex: The same 1000 rupees with which could serve you 10 meals before can now serve you only 9 because of inflation.
Redistribution of Income among groups: People who know how to save their assets from inflation gets protected but all others will lose the value of their monetary assets creating inequality.
Ex: Borrowers are benefitted with inflation as they now need to pay a lower value of money but lenders suffer. How? Suppose I have Rs.20. You wanted to buy an apple now which costs Rs.20 but don’t have money. So, you lend it from me with 10 % interest. So, you will have to give me Rs.22 next year. So, I am happy to give it to you as I can buy an apple and save 2 rupees next year. But unfortunately this year saw a high inflation of 20 % and hence apple cost is now Rs.24.
So, as a lender I lose 2 rupees in buying an apple instead of gaining 2 rupees but you as a borrower gained because the apple is worth more than 22 which you paid to me.
Loss of Business Confidence and fall in Investments: When the inflation is high, the aggregate demand reduces (remember that demand increases inflation but not the vice versa). Also companies anticipate an increase in interest rates to combat with inflation and hence will discourage them from investments. Also higher fluctuation leads to low confidence in investments. This is particularly important to India’s “Make in India” initiative.
Bad for Balance of Payments: Higher inflation will cause our exports to price more and imports to cost less. Hence, there will be lesser exports and more imports worsening the Balance of Payment.
By looking at all the above, it is evident that both a high inflation and low inflation are harmful to economy.
So how much should it be ?
Many countries have different desirable limits of inflation but all countries hope for a low and predictable rate of inflation. Even in India there are varied opinions on how much it should be,
High /unpredictable inflation
•    Low    /unpredictable    '    real'    return    for    companies    leading    to unpredictable profits/losses
•    No confidence in investing in India - Companies do not Invest
•    Dream of 'Make in India” lives forever like a dream! but some currently say that 2 to 6 % of inflation is good to have. All these make inflation the single most important macro-economic objective for most of the countries.
MEASURING INFLATION
Inflation target is set by the Govt. in consultation with RBI, once in every five years.
•    Inflation target is measured by the consumer price index- combined (CPI-C)
•    Inflation target is 4% (+/-) 2% for the period from August 5, 2016 to March 31, 2021.
•    If the average inflation is more than the upper tolerance level of 4% + 2%, that is, 6%, or less than the lower tolerance level of 4%- 2%, that is 2%, for any 3 consecutive quarters, it would mean a failure to achieve the inflation target.
•    Where RBI fails to meet the inflation target, it shall set out a report to the Central Government stating the reasons for failure to achieve the inflation target; remedial actions proposed to be taken by RBI; and an estimate of the time- period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions
In India, we generally use two indices to measure Inflation – Consumer Price Index (CPI) and Wholesale Price Index (WPI)

Wholesale Price Index (WPI):
•    It measures the change in price of goods in wholesale market – Currently 697 items(Producer-centric mainly)
•    Commodities & Weight in WPI
•    Primary    Articles    (Weight    22.62%)    (Items    117)    (in    Primary articles, Food articles weight is highest)
•    Fuel and Power (Weight 13.15%) (Items 16)
•    Manufactured Products (Weight 64.23%) (Items 564)
•    It is released by Office of Economic Advisor, Department of Industrial Policy and Promotion on a monthly basis.
•    Base year of WPI currently is 2011-12.
•    Pan India approach- Does not fluctuate often; better at targeting supply side constraints
•    But gets affected by international prices (Manufacturing- higher weightage)
•    It doesn’t take services sector and unorganized manufacturing sector into account.
•    Prices used for compilation do not include indirect taxes in order to remove impact of fiscal policy. Consumer Price Index (CPI):
•    It measures the change in price of goods and services of consumers
•    Its released by Central Statistics Office, Ministry of Statistics and Program Implementation on a monthly basis
•    Base year of CPI- 2012
•    As the consumption diversity is high, India currently has 7  CPI indicators
•    Imported Goods-included
•    Issues: Lack of
•    Competitive Integrated Market
•    Proper Infrastructure
MEASURES TO CONTROL INFLATION
Inflation is generally controlled by using monetary measures, fiscal measures or few other measures.
Let’s look at each of them in detail:
Credit Control: Central bank (RBI in India) can control the money flow into economy through various methods. Ex: Changing CRR, SLR, etc.
Demonetization of currency: It means to withdraw currency notes (generally higher denomination) from the economy. This brings out black money and helps control Inflation.
Issue of new currency: This is helpful to curb hyperinflation by exchanging old notes with a new note. But this burdens the small depositors.
Increase in taxes: Increasing tax leads to less disposable income, which cuts consumption and hence controls inflation. But increasing it to a very high-level leads to low savings and investment which slowdowns economy. Instead, tax benefits for investments and savings should be encouraged while using this measure.
Reduction of unnecessary Government expenditure and surplus budgets:
Cutting down
Unnecessary spending and also giving up deficit financing helps in reduction of money and controls inflation. Also public debt repayment should be stopped temporarily and more debt should be taken.
Increasing production: The main factor for inflation is not having enough supply for the increasing demand. There are various methods to increase production from expansion to increasing productivity.
Rational Wage Policy: To prevent inflation spiral from happening, the wages can be freeze-d or can be linked with productivity helps control inflation.
Price Control and Rationing: By either controlling prices of essential goods or distributing essential commodities, demand can be reduced and prices can be in check.
GDP DEFLATOR
GDP deflator, also called implicit price deflator, is a measure of inflation. It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.
•    GDP deflator in % terms = *100
•    Similar to GDP deflator there is also GNP deflator.
This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output.
Since the deflator covers the entire range of goods and services produced in the economy as against the limited commodity baskets for the wholesale or consumer price indices it is seen as a more comprehensive measure of inflation.
•    Inflation provides benefits to debtors and loss to creditors/bond-holders.
•    Limited inflation is good for growth in developing country.
•    Containing budgetary deficits and unproductive expenditure has proved relatively effective in controlling the double digit rate of inflation in the Indian economy during the recent years.
•    During inflation the central bank sells government securities. As a result money supply in the economy falls causing prices to fall and during deflation, the central bank will buy back the securities thus causing money supply to rise which cures deficiency in demand.
•    If budget deficit is financed by raising money, inflation may rise.
•    General (Headline) inflation is more volatile than Core inflation- it fluctuates more due to large changes in the relative prices of certain food items vulnerable to supply shocks.

1.    The Phillips Curve shows the inverse relationship between inflation and unemployment: as unemployment decreases, inflation increases.
2.    In economics, the Lorenz curve is a graphical representation of the distribution of income or of wealth. It was developed by Max O. Lorenz in 1905 for representing inequality of the wealth distribution.
3.    The J-curve effect/Curve is seen in economics when a country's trade balance initially worsens following a devaluation or depreciation of its currency.
4.    In economics, the Laffer curve is a representation of the relationship between rates of taxation and the resulting levels of government revenue.