Hello, students, welcome to the world of economics with a very engrossing lesson by the name of Inflation. Dear students, what is inflation, we shall find out soon. So let’s enjoy this lesson.

Coming across the screen are various newspaper clippings with the word ‘inflation’ clearly highlighted. Today inflation is a global economic concept.  It is found all over the world. So exactly what is inflation? So let’s find out. Inflation is rapidly rising prices, ‘mehengai’ as we say in Hindi. And when there is ‘mehengai’ definitely the common man suffers the most.

Let’s understand this with an example. Coming across the screen is our grandpa, he says that during his era with his 10 rupee note he could buy 10 pens, that means the cost of each pen was only Re. 1. The father says that during his era the same 10 rupee note fetched him 5 pens, that means the cost of each pen came to Rs. 2. Their little boy says that two months ago with the 10 rupee note he could buy 2 pens. The cost of each pen now came to how much, yes it came to Rs. 5. And the little boy further said that today when he went to the general store, the same 10 rupee note fetched him only one pen, that means the cost of each pen has come to Rs. 10.

Dear students, I have a question for you. Tell me the prices have risen from the phase of grandfather to father so is this phase of price rise, inflation? No, my dear students, this is not known as inflation. Another question, the prices from grandfather to father is not inflation. What about the price rise from the father to the little son’s phase, is this price rise known as inflation? No, once again. Now comes the third phase two months ago and today, is this price rise known as inflation? Yes, my dear students, this phase of price rise is definitely called as inflation. What makes it inflation? This is because inflation is rapidly rising prices in a short period of time. So whenever prices are rising in a short period of time we call it as inflation and generally in economics it is a period of one year of price rise.

So during inflation exactly what happens? During inflation the purchasing power of the money falls. What do you mean by purchasing power of the money? It is the amount of goods and services that a unit of money can buy. So you can clearly see that two months ago, the little boy with his 10 rupee note could buy 2 pens, but today with the same 10 rupee note he was able to buy only 1 pen, that means the purchasing power of the money has fallen.

My dear students, when prices rise, they rise at different speeds. So what are we going to do is find out the different types of inflation. The first type of inflation is known as the creeping inflation. At this time the price monster creeps along with a speed of upto 2% per annum.  Another type of price rise is known as walking inflation. During this phase the price monster is going to walk at the speed of 3 to 10%. India today that is February 2016 is having a price rise of 5.76% that means we are having walking inflation. Then comes the third type of price rise, known as running inflation.  In running inflation the price monster starts running at the speed of 10 to 20% per annum and that is quite dangerous. And the fourth type of price monster coming on the screen is known as hyper inflation or galloping inflation, in which the price rises are from 20 to 100 to 200 to 300 to 500 and so on. So these were the four types of inflation and we are going to understand all about them.

Let’s continue further and conclude with one definition from Professor Crowther. According to Professor Crowther, what is inflation. He says that inflation is a state in which the value of money is falling that is prices are rising. What do you mean by ‘state’? State is a situation, so inflation is a situation in which the value of money is falling. What is ‘value of money’? Yes, it is the purchasing power of money. The little boy two months ago with a 10 rupee note could buy two pens, and today the same 10 rupee note fetched him only one pen. That means two months ago the value of the money was higher as compared to today. So definitely the value of money keeps falling during inflation.  But look closely and you will find that Professor Crowther’s definition only emphasised on the rise in price level as a symptom rather than the cause of inflation. In Professor Crowther’s definition, the reason for the price rise is not mentioned. He focused only on the symptom of inflation. Now what do you mean by ‘symptom’? Symptom means an indication, so he showed an indication of price rise. He focused only on the symptom of inflation. What is that? Symptom of inflation is the rise in the price level, whenever the inflation comes the price level keeps rising, that is a symptom.  And he did not focus on the causes of inflation. So Professor Crowther’s definition fails to explain why the price level of inflation increases from time to time. The definition by Professor Crowther which comes in your exam for two marks. In the next module we shall find out about the economist who gave the causes of inflation.