Term Paper on

Inflation
Prepared for:
Ms. Janifar Alom

Assistant Professor of Economics & Assistant Proctor.

University of Information Technology and Sciences

Prepared by:
NO Name ID
01 Sadia Islam Mou 0432310004081027
02 Unaiza Rahman 0432310004081030
03 Kutub Uddin Nahid 0432310004081035
04 Mahadi Hasan Rimu 0432310004081020
05 Arrafe Tabassum Rose 0432310004081014
06 Ummay Habiba Monira 0432310004081007

Course Title: Macro Economics

Course Code: ECO 215
Section: A
Batch: 55
Date of Submission: May 05, 2024

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Letter of Transmittal

May 05, 2024

Ms. Janifar Alom

Assistant Professor of Economics & Assistant Proctor.

University of information technology and sciences

Subject: submission of term paper

Dear Mam,

We are presenting a report named "Inflation". As an aspect of the prerequisite of the course.
Your role has been continued in each part of setting up this task. We have truly delighted in
taking a slot at this task and we trust that our work would meet the degree of your desire.
Any inquiry on this task is valued.

We are grateful for your guidance, supervision, and inspiration in doing this report.

We would look forward to your valuable feedback.

Thank you!

Sincerely.

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 Table of content

NO CONTENT NAME PAGE NO

01 Introduction 04

02 Causes of Inflation 04

03 Types of Inflation 07

04 Effects of Inflation 11

05 Inflation Measures 13

06 How to control Inflation 15

07 Impact of Inflation 19

08 Conclusion 20

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Name: Sadia Islam Mou ID: 0432310004081027

Introduction

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate
of the rate at which the decline in purchasing power occurs can be reflected in the increase of an
average price level of a basket of selected goods and services in an economy over some period of
time. The rise in the general level of prices, often expressed as a percentage, means that a unit of
currency effectively buys less than it did in prior periods. Inflation can be contrasted with deflation,
which occurs when the purchasing power of money increases and prices decline.

Causes of Inflation
There are different causes of inflation. Some crucial causes that create inflation given below.

➢ Primary Causes: In an economy, when the demand for a commodity exceeds its
supply, then the excess demand pushes the price up. On the other hand, when the factor
prices increase, the cost of production rises too. This leads to an increase in the price level
as well.

➢ Increase in Public Spending: In any modern economy, Government spending is an

important element of the total spending. It is also an important determinant of aggregate
demand.
Usually, in lesser developed economies, the Govt. spending increases which invariably
creates inflationary pressure on the economy.

➢ Deficit Financing of Government Spending: There are times when the spending
of Government increases beyond what taxation can finance. Therefore, in order to incur
the extra expenditure, the Government resorts to deficit financing.
For example, it prints more money and spends it. This, in turn, adds to inflationary pressure.

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➢ Increased Velocity of Circulation: In an economy,

“The total use of money = The money supply by the Government × The velocity of
circulation of money.”
When an economy is going through a booming phase, people tend to spend money at a
faster rate increasing the velocity of circulation of money.

➢ Population Growth: As the population grows, it increases the total demand in the
market. Further, excessive demand creates inflation.

➢ Hoarding: Hoarders are people or entities who stockpile commodities and do not release
them to the market. Therefore, there is an artificially created demand excess in the
economy. This also leads to inflation.

➢ Genuine Shortage: It is possible that at certain times, the factors of production are
short in supply. This affects production. Therefore, supply is less than the demand, leading
to an increase in prices and inflation.
Exports: In an economy, the total production must fulfill the domestic as well as foreign
demand. If it fails to meet these demands, then exports create inflation in the domestic
economy.

➢ Trade Unions: Trade union work in favor of the employees. As the prices increase,
these unions demand an increase in wages for workers. This invariably increases the cost
of production and leads to a further increase in prices.

➢ Tax Reduction: While taxes are known to increase with time, sometimes, Governments
reduce taxes to gain popularity among people. The people are happy because they have
more money in their hands.
However, if the rate of production does not increase with a corresponding rate, then the
excess cash in hand leads to inflation.

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 ➢ The imposition of Indirect Taxes: Taxes are the primary source of revenue for a
Government. Sometimes, Governments impose indirect taxes like excise duty, VAT, etc.
on businesses.
As these indirect taxes increase the total cost for the manufacturers and/or sellers, they
increase the price of the product to have a minimal impact on their profits.

Price-rise in the International Markets

Some products require to import commodities or factors of production from the international
markets like the United States. If these markets raise prices of these commodities or factors of
production, then the overall production cost in India increases too. This leads to inflation in the
domestic market.

Non-economic Reasons: There are several non-economic factors which can cause inflation
in an economy. For example, if there is a flood, then crops are destroyed. This reduces the supply
of agricultural products leading to an increase in the prices of the commodities.

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Name: Unaiza Rahman ID: 0432310004081030

Types of Inflation
There are two types of inflation.
▪ Demand pull inflation.
▪ Cost push inflation.

❖ Demand pull inflation: Demand-pull inflation occurs when the demand for goods and
services in an economy exceeds its supply, leading to an increase in the general price level.
This can be due to factors such as increased consumer spending, investment, or government
expenditure, creating excess demand pressure on available resources.

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➢ Causes of Demand-Pull Inflation:

• Increased Consumer Spending: A rise in consumer confidence and disposable

income can lead to a surge in spending. This can happen due to factors like tax cuts,
wage increases, or easy access to credit.
• Increased Business Investment: When businesses are optimistic about the
economy, they may invest more in equipment, technology, and inventory. This
increased demand for resources can put upward pressure on prices.
• Increased Government Spending: If the government increases its spending on
infrastructure, social programs, or defense, it injects more money into the economy.
This can lead to higher demand for goods and services, potentially causing inflation.

• Growth in Exports: A surge in exports can also create demand-pull inflation. As

foreign countries buy more domestic goods, it reduces the supply available
domestically, driving prices up.

• Easy Money Policy: When central banks lower interest rates or increase the
money supply, it can make it cheaper for businesses and consumers to borrow money.
This can lead to increased spending and ultimately, inflation.

➢ Effects of Demand-Pull Inflation:

• Higher Prices: The most obvious consequence is a rise in the general price level
of goods and services. This can erode purchasing power and make it more expensive
for consumers and businesses.

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 • Increased Economic Activity: In the short term, demand-pull inflation can lead
to a booming economy with higher employment and output. However, if not
controlled, it can spiral out of control.

• Uncertainty and Unpredictability: High inflation can create uncertainty for

businesses and consumers when planning investments and purchases.

❖ Cost-push inflation: Cost-push inflation is a type of inflation caused by increases in the

cost of production or the prices of factors of production, such as labor, raw materials, or energy.
As production costs rise, producers pass on these increased costs to consumers in the form of
higher prices for goods and services, leading to inflation.

Cost-push Inflation

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➢ Causes of cost push inflation:
Several factors can trigger cost-push inflation, including:

• Increased Input Costs: Rises in the prices of raw materials, labor, energy, or
transportation can squeeze profit margins for businesses. To maintain profitability,
they may be forced to raise product prices, passing the cost increase on to consumers.

• Supply Shocks: Events that disrupt the supply chain, such as natural disasters,
wars, or pandemics, can lead to shortages of essential goods and inputs. This scarcity
drives prices up due to reduced availability.

• Government Policies: Government actions like increased taxes, tariffs, or

environmental regulations can raise production costs for businesses. These costs may
then be reflected in high

➢ Impact:

Cost-push inflection can have several consequences:

• Reduced Purchasing Power: As prices rise, consumers' purchasing power

diminishes. They can afford less with the same amount of money, leading to a decline
in living standards.

• Lower Economic Growth: Businesses may be hesitant to invest and expand due to
rising costs and uncertainty. This can dampen economic activity and hinder growth.

• Stagflation: In extreme cases, cost-push inflation can coexist with high

unemployment (stagnation). This scenario is particularly challenging as it offers
policymakers limited options for intervention.

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Name: Md. Kutub Uddin Nahid ID: 0432310004081035

Effects of Inflation

Inflation can have a number of effects on the economy, both positive and negative. Here are some
of the key points.

• The price level of goods and services continue to rise: The ongoing rise in the
price level of goods and services in an economy over time. A fixed amount of money will
buy you less goods and services over time.

For example, if a gallon of milk costs $2.00 today, it might cost $2.20 in a year due to
inflation.

• Reduced purchasing power: This is the most common effect of inflation. As prices
rise, the value of your money goes down. This means you can buy less with the same
amount of money over time. This can be especially hard for people on fixed incomes, such
as retirees.

For example, Today with $100 you might be able to buy a basket full of groceries,
including milk, bread, meat, vegetables, and fruits. Now, let's say inflation rises by 5% in
a year. This means the price level of goods and services goes up by 5%. The milk, bread,
meat, vegetables, and fruits you bought for $100 last year might now cost $105 due to
inflation. With your $100 you might not be able to buy the exact same basket of groceries
as before.

• Value of money will decrease: The value of your money decreases over time for
inflation.

For example, today with $10 you might be able to buy a nice movie ticket and some
popcorn. With inflation ten years down the line a movie ticket and popcorn might cost $12

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 or even $15. The value of your $10 has decreased because the price of those goods has
increased. This decrease in value is what we mean by inflation.

• Benefit producers: Inflation can benefit producers in a couple of ways, but it's important
to remember it's not always a guaranteed positive impact.

For example, with inflation the general price level of goods and services goes up. This
allows producers to raise the selling prices of their own products without necessarily losing
customers. Imagine a bakery sells bread for $2. Due to inflation, the cost of ingredients like
flour and sugar might increase. The bakery can raise the price of bread to $2.20 to maintain
their profit margins, even though their own costs have gone up.

• Uncertainty and economic instability: High inflation can create uncertainty in the
economy, as businesses and consumers become hesitant to invest or spend money. This can
lead to slower economic growth.

• Income inequality: Inflation can widen the gap between rich and poor. People with higher
incomes are better able to cope with rising prices, while those on low incomes may struggle
to afford basic necessities.

• Debt burden reduced: On the other hand, inflation can reduce the burden of debt. If you
borrow money and then inflation rises, the real value of your debt goes down over time. This
can be beneficial for homeowners with fixed-rate mortgages.

• Interest rate changes: Central banks often raise interest rates in an attempt to control
inflation. This can slow down economic growth but also make saving money more attractive.

Overall, the effects of inflation depend on a variety of factors, including the rate of inflation
and how long it lasts. However, it's important to be aware of the potential consequences of
inflation so we can make informed financial decisions.

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Name: Mahadi Hasan Rimu ID: 0432310004081020

Inflation Measures

Inflation refers to the sustained increase in the general price level of goods and services in an
economy over time. To measure this change economists rely on various inflation metrics. Here's a
breakdown of some key measures:

• Consumer Price Index (CPI): This is the most widely used inflation measure. It tracks
the average price changes of a basket of goods and services that a typical urban consumer
purchases. The CPI is calculated by comparing the cost of this basket in the current period to a
base period. Bangladesh, like many countries, uses the CPI as its primary inflation measure.

• Producer Price Index (PPI): This index measures the average change in prices received
by domestic producers for their output. It reflects inflation at the wholesale level before goods
reach consumers. The PPI can be an indicator of future CPI inflation.

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• Core Inflation: This measure excludes volatile components like food and energy prices from
the CPI calculation. Since food and energy prices can fluctuate significantly due to factors
outside the control of the economy, core inflation helps isolate the underlying inflationary
trends,

Inflation Measures in Bangladesh

Bangladesh primarily uses the Consumer Price Index (CPI), calculated by the Bangladesh
Bureau of Statistics (BBS), to measure inflation. As of March 2024, Bangladesh faces a significant
challenge with inflation. The year-on-year (point-to-point) inflation rate based on the CPI is
9.81%, and the 12-month average inflation rate is around 9.69% [Current Inflation - Bangladesh
Bank]. This indicates a sustained rise in prices across various goods and services.

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Calculating inflation rate

Inflation Formula: The formula to calculate inflation is:

Inflation Rate = ((P1 – P0) / P0) X 100

Here,

• P0 represents the average price of the basket of goods and services in the first period.
• P1 represents the average price of the same basket in the second period.

Example:

Let's say the average cost of a basket of essential goods in Bangladesh was 5000 taka in January
2023 (P0) and 5500 taka in January 2024 (P1).

Inflation Rate = ((5500 taka - 5000 taka) / 5000 taka) * 100 = (500 taka / 5000 taka) * 100 =
10%

This calculation suggests a 10% inflation rate between January 2023 and January 2024 based on
this simplified basket of goods.

Name: Arrafe Tabassum Rose ID: 0432310004081014

How to control inflation

Controlling inflation involves a mix of monetary, fiscal, and supply-side measures. Here's a brief
outline:

• Monetary Policy: Central banks can adjust interest rates to control inflation. Raising
rates can reduce spending and borrowing, slowing down economic activity and inflation.

• Open Market Operations: Central banks buy or sell government securities to

influence the money supply. Selling securities reduces money in circulation, curbing
inflation.

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• Reserve Requirements: Central banks can adjust the amount of reserves banks must
hold, affecting their ability to lend. Increasing reserves tightens credit, dampening inflation.

• Fiscal Policy: Governments can adjust taxes and spending. Reducing government
spending or increasing taxes can reduce aggregate demand, dampening inflationary
pressures.

• Supply-Side Policies: Measures to increase productivity and efficiency can help

mitigate cost-push inflation. This includes investments in infrastructure, education, and
technology.

• Price Controls: Governments may impose price ceilings or floors on essential goods to
prevent excessive price increases or decreases, although these can have unintended
consequences.

• Wage Controls: Limits on wage increases can prevent wage-price spirals, where higher
wages lead to higher prices, feeding back into further wage demands.

• Exchange Rate Policy: Governments can influence exchange rates to affect import
prices, which can impact domestic inflation.

• Inflation Targeting: Central banks may set specific inflation targets to guide their
monetary policy decisions, aiming for stable and predictable inflation rates.

• Public Confidence: Maintaining public trust in the government's ability to control

inflation is crucial. Clear communication and consistent policy actions help manage
expectations and anchor inflationary pressures.

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Name: Ummay Habiba Monira ID: 043231004081007

Impact of Inflation

Inflation, the gradual increase in the prices of goods and services over time, has far-reaching
implications on economies, businesses, social, individuals and different aspects. From eroding
purchasing power to influencing interest rates and investment decisions, its impact is multifaceted.
The impact of inflation on different aspects given below.

Impact on business: Inflation can be a double-edged sword for businesses, bringing both
challenges and potential opportunities. Here's a breakdown of its impact:

➢ Increased Costs:

• Raw materials and supplies: This is the most immediate effect. As inflation
rises, the cost of everything from lumber to computer chips increases. This squeezes
profit margins if businesses can't raise their prices accordingly.

• Labor expenses: With inflation, employees often expect raises to maintain their
purchasing power. This puts pressure on businesses to increase wages, further
impacting costs.

• Other expenses: Rent, utilities, transportation - all these see an increase during
inflation adding to the business's financial burden.

➢ Decreased Demand:
• Reduced consumer spending: As inflation eats into people's wallets, they tend
to cut back on discretionary spending. This can lead to lower sales for businesses,
especially those selling non-essential goods.

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 • Uncertainty and risk aversion: Inflation creates an unpredictable economic
climate. Businesses might delay investments or expansion plans due to this uncertainty.
➢ Potential Benefits:

• Hedge against debt: If a business has outstanding debt, inflation can actually be
beneficial. The debt becomes easier to pay off as the value of money decreases.

• Price increases: Businesses can raise their prices to offset inflation and maintain
profitability. However, this can be a delicate balancing act to avoid losing customers.

➢ Social Impact:

Inflation can have a big negative impact on society, especially for those who are already
struggling financially. Here's a quick rundown of some of the social impacts:

• Reduced purchasing power: This means that people's money buys less as prices
go up. This can make it difficult to afford basic necessities like food and housing.

• Widened income inequality: Inflation often hurts low-income households the

most. Since their wages may not rise as fast as prices, they have to cut back on essential
things.

• Social unrest: When people are struggling to make ends meet, it can lead to social
unrest and even violence.

• Erosion of trust: High inflation can erode people's trust in the government and the
economic system.

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➢ Economic Impacts: Inflation, the rise in prices over time, has a complex impact on
economies. Here's a breakdown of some of the key effects:

❖ Negative Impacts:

• Reduced Purchasing Power: This is the most common consequence. As

prices rise, the value of money falls. People can buy less with the same amount
of cash, straining household budgets.

• Unequal Burden: Low-income earners are disproportionately affected by

inflation. A larger share of their income goes towards essentials like food and
housing, which tend to see price hikes faster.

• Higher Interest Rates: To combat inflation, central banks often raise interest
rates. This discourages borrowing and investment, potentially slowing economic
growth.

• Uncertainty and Distortions: Unpredictable inflation makes it difficult for

businesses and consumers to plan. It can also distort investment decisions and
resource allocation.

• Recession Risk: If inflation spirals out of control, central banks may have to
take drastic measures to raise interest rates, which can trigger a recession.

❖ Positive Impacts (to a limited extent):

• Debt Erosion: Inflation can benefit borrowers as it reduces the real value of
debt over time. For example, if inflation is 3% and your interest rate is 2%, the
effective interest rate is negative (1%).

• Economic Growth (Short-Term): In the short term, a moderate level of

inflation can encourage spending and investment, boosting economic activity.
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 ➢ International trade: Inflation can impact international trade in a couple of key ways:

• Exchange Rates: Inflation affects currency exchange rates. When a country has high
inflation, its currency tends to weaken relative to other currencies. This can make the
country's exports cheaper and imports more expensive. Cheaper exports can be a good
thing in the short term, but high inflation can also erode profit margins for exporters.

• Trade Patterns: Inflation can also influence trade patterns by making it difficult for
businesses to accurately price their products for export. In a high-inflation environment,
there's uncertainty about future production costs, which can make it challenging to set
competitive prices. This can discourage businesses from exporting and instead focus on the
domestic market where prices are more predictable.

Here's a breakdown of the effects:

❖ High Inflation in a country:

o Exports become cheaper (initially good for exporters)

o Imports become more expensive
o Uncertainty about future production costs discourages exports

❖ Low High Inflation in a country:

o Exports become more expensive

o Imports become cheaper
o More predictable pricing environment can encourage exports.

Conclusion

In conclusion, inflation is a complex economic phenomenon with various causes, types, and
effects. It arises from factors like increased demand, supply shocks, or monetary policies. Its
effects range from reduced purchasing power to uncertainty in financial markets. Governments
and central banks employ measures like monetary policy adjustments, fiscal policies, and supply-

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side interventions to control inflation. However, the impact of inflation extends beyond economic
realms, affecting individuals' standard of living, businesses' profitability, and overall societal well-
being. Therefore, managing inflation effectively is crucial for maintaining economic stability and
fostering sustainable growth.

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Reference:
https://www.brookings.edu/articles/how-does-the-government-measure-inflation/

https://research.stlouisfed.org/publications/economic-synopses/2022/06/21/inflation-part-1-what-
is-it-exactly

Book name:Economics

• Writer: Samuelson-Nordhaus

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