n lation and siness le 7.3
Inflation is measured ‘point-to-point’. It suggested controls on prices and incomes as direct
means that the reference dates for the annual ways of checking such an inflation and, ‘moral
inflation is January 1 to January 1 of two suasions’ and measures to reduce the monopoly
consecutive years (not for January 1 to December power of trade unions as indirect measures
31 of the concerned year). Similarly, the weekly (basically, cost-push inflations chiefly used to
rate of inflation is the change in one week reference happen due to higher wage demanded by the trade
being the two consecutive last days of the week unions during the era).
(i.e., 5 p.m. of two Fridays in India). Today, the governments of the world use
many tools to check such inflations—reducing
Why InflatIon occurs excise and custom duties on raw materials, wage
Economists have been giving different explanations revisions, etc.
throughout the 19th and 20th centuries for the
occurrence of inflation—the debate still goes on.
But the debate has certainly given us a clearer After the rise of Monetaristic School of Economics
picture of inflation. We shall see the reasons in the early 1970s (monetarism developed in
responsible for inflation in two parts— opposition to post-1945 Keynesian idea of
demand management), the school provided
1. Pre-1970s monetarist explanation for inflation, the so-called
Till the rise of the monetarist school, economists ‘demand-pull’ or the ‘cost-push’ which is excessive
used to agree upon two reasons behind inflation: creation of money in the economy.
(a) Demand-Pull Inflation (a) Demand-Pull Inflation
A mis-match between demand and supply pulls For the monetarists, a demand-pull inflation is
up prices. Either the demand increases over the creation of extra purchasing power to the consumer
same level of supply, or the supply decreases over the same level of production (which happens
with the same level of demand and thus the due to wage revisions at the micro level and deficit
situation of demand-pull inflation arise. This was financing at the macro level). This is the typical
a Keynesian idea. The Keynesian School suggests case of creating extra money (either by printing
cuts in spending as the way of tackling excess or public borrowing) without equivalent creation
demand mainly by increasing taxes and reducing in production/supply, i.e., ‘too much money
government expenditure. chasing too little output’—the ultimate source of
In practice, the governments keep tracking demand-pull inflation.
the demand-supply matrix to check such inflation.
(b) Cost-Push Inflation
Depending upon the situation, the goods in short
supply are imported, interest on loans increased Similarly, for the monetarists, ‘cost-push’ is not
and wages revised. a truly independent theory of inflation—it has
to be financed by some extra money (which is
(b) Cost-Push Inflation created by the government via wage revision,
An increase in factor input costs (i.e., wages and public borrowing, printing of currency, etc.). A
raw materials) pushes up prices. The price rise price rise does not get automatically reciprocated
which is the result of increase in the production by consumers’ purchasing. Basically, people must
cost is cost-push inflation. The Keynesian school have got some extra purchasing power created