INFLATION / RISE IN GENERAL PRICE LEVEL

Outline:
1. Introduction
2. Causes of Inflation
a) Faulty Economic Policy
b) Inflow of Foreign Aid
c) Import of Luxury Goods
d) Rate of Increase in Population.
3. Kinds of Inflation
a) Commodity Inflation
b) Capital Inflation
c) Income Inflation
d) Demand Pull Inflation
4. Remedies of Inflation

Inflation is situation in which prices are rising and value of money is falling due to increase in supply of money. “When too much money chases too few goods is called Inflation.” Crowther says that Inflation is situation in which the value of money is falling, i.e. prices are rising. If there is no increase in output of goods and services, expansion of the money supply raises the general level of process. In other words Inflation describes a fall in the purchasing power of money. So in ordinary speech, Inflation is often taken to mean high prices.
There are many causes of inflation. First faulty economic policy of Govt. is one of the major causes. Sometimes, to meet the deficit in budget the Govt. issues more currency. The supply of money in circulation increases. But the supply of goods and services remain the same. This results in prices high. Secondly, the inflow of foreign aid also enhances the rate of inflation. Thirdly, import of unnecessary things and spending the foreign exchange on luxury goods also bring about inflation. Fourthly, high rate of increase in population is yet another cause. With the increase in population demand for services and goods like food, clothing, housing, water supply, electricity, sanitation increases. If the supply remains the same, the prices spiral up. Finally low production also gives birth to inflation. When agricultural and industrial production decreases, a shortage of goods and services is created. This again in results in high prices.
There are some kinds of inflation. When the prices of commodities increased more than the proportionate increase in cost of production then it is known as commodity inflation. Capital inflation is due to increase in price of new investment. Income inflation is said to exist when there is rise in cost of production and income of the factor is also increase. The commodity inflation and capital inflation lead to profit inflation in the country. If the pressure of demand is such that it can not be met by the supply of output is called demand pull inflation.
In the following way inflation can be controlled. First, the import of luxury items must be restricted. It will protect us from international inflation. Secondly, there should be a cut on the non-productive expenditures. Thirdly, private sector should be allowed to play its role more effectively. Fourthly, sick industries should be handed over to private sector. The capital punishment should be given so that artificial shortage of commodities may be controlled and inflation may be removed.