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.
                                                           2. Post-1970s
     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