GLOBAL INDIAN INTERNATIONAL SCHOOL
WHITEFIELD BANGALORE
ECONOMICS PROJECT REPORT ON:
INFLATION
SUBMITTED TO: Ms. Seena S
SUBMITTED BY: Angelina Pauline George
XIIC–COMMERCE A
CERTIFICATE
This is to certify that Angelina Pauline George, Roll No. 5 of
class XIC Commerce A of GIIS, Whitefield, Bangalore has
successfully submitted Economics Project on “Inflation”
academic session 2025-2026 towards SSCE (Class XII) Practical
examination conducted in Economics as per CBSE guidelines.
Internal Examiner: ________________
External Examiner: ________________
__________________
Principal GIIS:
ACKNOWLEDGEMENT
I would like to express my heartfelt gratitude to MY teacher
Ms. Seena S as well as our Principal Mr. Manoj Kumar Tiwari
who have given the golden opportunity to do this amazing
project on the topic: Inflation. It helped me to learn about
Inflation in our modern day economy, types of inflation, merits
and demerits of inflation, etc.
Name: Angelina Pauline George
Grade XI C Commerce A
INDEX
INTRODUCTION- What is Inflation?
A general increase in the cost of goods and services over time is the
meaning inflation, which is a slow decline in buying power. The
average annual price increase of a basket of chosen goods and services
is used to compute the inflation rate. Whereas low inflation indicates
slower price growth, high inflation indicates faster price growth.
Deflation, which happens when prices fall and buying power rises, is
the opposite of inflation.
The rate at which the cost of goods and services is increasing is
measured by inflation.
● Inflation measures how quickly the prices of goods and services
are rising.
● Inflation is classified into three types: demand-pull inflation,
cost-push inflation, and built-in inflation.
● The most commonly used inflation indexes are the Consumer
Price Index and the Wholesale Price Index.
● Inflation can be viewed positively or negatively depending on the
individual viewpoint and rate of change.
● Those with tangible assets may like to see some inflation as it
raises the value of their assets.
KEEP IN MIND:
1.Some Price Changes are more important than others
When working out the average rise in prices, more importance is given
to products we spend more money on, like electricity, compared to
cheaper items like sugar or postage stamps.
2.Different People Buy Different things
Every household has different spending habits: some have a car and eat
meat, others travel solely by public transport or are vegetarian. The
average spending habits of all households together determine how
much weight the different products and services have in the
measurement of inflation.
For measuring inflation, all goods and services that households
consume are taken into account, including:
● everyday items (such as food, newspapers and petrol)
● durable goods (such as clothing, PCs and washing machines)
● services (such as hairdressing, insurance and rented housing)
3.Compare the Price of Shopping Basket from Year to Year
All the goods and services used by households throughout the year are
grouped into a “basket” of items. Each item in this basket has a price,
which can vary over time. The annual inflation rate is calculated by
comparing the price of the entire basket in a given month with its price
in the same month of the previous year.
UNDERSTANDING INFLATION
Inflation is caused by an expansion of the money supply, though this
can occur through a variety of economic processes. The monetary
authorities of a nation can raise the amount of money in circulation by:
● Printing additional money and giving it to citizens
● Lowering the value of the legal tender currency through legal
devaluation (reducing the value).
● Acquiring government bonds from banks on the secondary
market to create new funds that are lent into existence as reserve
account credits through the banking system
Other factors contributing to inflation include shortages of essential
items and supply constraints, which can raise prices.
When inflation occurs, money loses its purchasing power. This can
occur across any sector or throughout an entire economy. The
expectation of inflation itself can further sustain the devaluation of
money. Workers may demand higher wages and businesses may charge
higher prices, in anticipation of sustained inflation. This, in turn,
reinforces the factors that push prices up.
CAUSES OF INFLATION
Increased production costs related to labor, raw resources, or market
disruptions are some of the causes of inflation. Inflation can also
result from higher demand, and some monetary and fiscal policies, like
tax breaks or reduced interest rates, may also be contributing factors.
Inflation is tracked by the central banks of industrialized nations, such
as the Federal Reserve in the United States. Price increases for
essentials may become unaffordable if inflation picks up too quickly.
Additionally, inflation devalues currency, reduces consumer
purchasing power, and may make it more difficult to save money.
● Price increases brought on by rising labor and raw material costs,
market disruptions, increased consumer demand, and monetary
and fiscal policies can all lead to inflation.
● The rate at which the prices of goods and services in an economy
are growing is known as inflation.
● Some businesses benefit from inflation if they are able to raise
their prices because of the strong demand for their goods.
Potential Root Causes of Inflation
● Cost-push inflation
● Demand-pull inflation
● Built-in inflation
● The housing market
● Expansionary monetary and fiscal policy
● Monetary devaluation
TYPES OF INFLATION
Inflation can be classified into three types: demand-pull inflation,
cost-push inflation, and built-in inflation.
1.Demand-Pull Effect
Demand-pull inflation happens when a rise in the supply of money and
credit causes overall demand for goods and services to grow faster
than the economy’s ability to produce them. This higher demand
pushes prices up.
When people have more money, it boosts consumer confidence. As a
result, spending increases, driving prices even higher. This creates a
gap between demand and supply, where demand is greater but supply
cannot adjust quickly, leading to higher prices.
2.Cost-Push Effect
Cost-push inflation happens when rising prices move through the
production process inputs. When increases in the supply of money and
credit are directed into commodity or asset markets, the costs of
various intermediate goods go up. This effect is especially strong when
a negative economic shock affects the supply of important
commodities.
These changes lead to higher costs for final products or services, which
eventually result in higher consumer prices. For example, if the money
supply grows, it can trigger a speculative surge in oil prices. As a result,
energy costs may rise and push up consumer prices, which shows up
in different inflation measures.
3.Built-In Inflation
Built-in inflation is connected to adaptive expectations, which is the
idea that people believe the current rate of inflation will continue into
the future. As the prices of goods and services rise, individuals begin to
expect that prices will keep increasing at a similar pace over time.
Because of these expectations, workers may start to demand higher
wages or additional compensation to preserve their purchasing power
and maintain their standard of living. In response, businesses often
raise the prices of their goods and services to cover the higher labor
costs. This creates a cycle known as the wage-price spiral, where rising
wages push prices higher, and in turn, higher prices lead to further
wage demands. This continuous back-and-forth between wages and
prices sustains inflation over time.
HOW INFLATION IMPACTS PRICES
Human requirements are not limited to one or two things, even if it is
simple to track price changes over time for certain products. To live
comfortably, people require a wide range of services and a large and
varied selection of goods. They comprise services like labor,
entertainment, and healthcare, as well as goods like food grains, metal,
and fuel, as well as utilities like transportation and power.
The overall effect of price fluctuations for a wide range of goods and
services is what inflation seeks to quantify. It makes it possible to
describe the rise in the level of prices for goods and services in an
economy over a given period of time with a single value.
One unit of money can purchase fewer products and services as prices
rise. The general public's cost of living is impacted by this decline in
purchasing power, which eventually causes economic growth to slow.
Economists generally agree that persistent inflation happens when a
country's money supply expands faster than its economy.
The monetary authority, which is typically the central bank, fights this
by managing credit and the money supply in order to keep inflation
within acceptable bounds and maintain a healthy economy.
In theory, monetarism is a widely accepted theory that explains how
inflation and an economy's money supply are related. For instance,
enormous quantities of gold and silver poured into the economies of
Spain and other European countries after the Spanish conquered the
Inca and Aztec empires. Prices rose quickly as a result of the money
supply expanding so quickly that money lost value.
Different methods are used to measure inflation based on the kinds of
products and services. It is the reverse of deflation, which occurs when
the inflation rate drops below zero and signifies a broad drop in prices.
Recall that disinflation, a related term that describes a slowing of the
(positive) rate of inflation, should not be confused with deflation.
TYPES OF PRICE INDEXES
Various kinds of baskets of products are computed and monitored as
price indices, depending on the chosen combination of goods and
services. The Consumer pricing Index (CPI) and the Wholesale Price
Index (WPI) are the two most widely used pricing indices.
1.Consumer Price Index (CPI)
A measure known as the Consumer Price Index (CPI) looks at the
weighted average of prices for a selection of goods and services that
are essential to consumers. These consist of food, transportation, and
healthcare.
Price increases for each item in the predefined basket of products are
averaged according to their relative weight in the entire basket to get
the CPI. The retail prices of each item as they are offered for sale to
private persons are the prices taken into account. The value of one
currency in relation to those of other countries might be affected by
CPI.
One of the most widely used statistics for determining periods of
inflation or deflation is the CPI, which is used to evaluate price
fluctuations related to the cost of living.
2.Wholesale Price Index (WPI)
Another often used indicator of inflation is the WPI. It calculates and
monitors the variations in product prices in the phases before the
retail level.
WPI goods are primarily at the producer or wholesale level, though
they differ from nation to nation. Cotton costs for raw cotton, cotton
yarn, cotton gray items, and cotton apparel are all included, for
instance.
The WPI is used by many nations and organizations, while the
Producer Price Index (PPI) is a comparable version used in many other
nations, including the United States.
3.Producer Price Index (PPI)
The PPI is a family of indexes that measures the average change in
selling prices received by domestic producers of intermediate goods
and services over time. The PPI measures price changes from the
perspective of the seller and differs from the CPI, which measures
price changes from the perspective of the buyer.
In all variants, the rise in the price of one component (say oil) may
cancel out the price decline in another (say wheat) to a certain extent.
Overall, each index represents the average weighted price change for
the given constituents which may apply at the overall economy, sector,
or commodity level.
ADVANTAGES AND DISADVANTAGES OF INFLATION
Depending on one's stance and the rate of change, inflation can be
viewed as either a positive or negative phenomenon.
Advantages
1. Benefits for Asset Holders
Individuals who own tangible assets, such as property or stored
commodities priced in their local currency, may favor some inflation. This
is because inflation raises the value of their assets, allowing them to sell at
higher prices.
2. Increased Speculation and Investment
Inflation often encourages businesses to invest in riskier projects and
individuals to invest in company stocks. They do this because they
anticipate higher returns that will outpace inflation.
3. Encouraging Spending Over Saving
A moderate level of inflation is often seen as beneficial because it motivates
people to spend rather than save. If money is expected to lose value over
time, individuals may prefer to spend now instead of saving and spending
later. This tendency to spend can boost overall economic activity.
4. Maintaining a Balanced Inflation Rate
Keeping inflation at an optimum and manageable level is considered
important. A balanced approach helps ensure that inflation stays within a
desirable range, promoting healthy economic growth without causing
instability.
Disadvantages
1. Impact of Inflation on Buyers and Asset Holders
Buyers of tangible assets may dislike inflation because it forces them to
spend more money. Similarly, people holding assets priced in their
home currency, such as cash or bonds, may also be negatively affected,
as inflation reduces the real value of their holdings.
2. Investment Strategies to Hedge Against Inflation
Investors who want to protect their portfolios from inflation should
consider inflation-hedged asset classes, including gold, commodities,
and real estate investment trusts (REITs). Another popular option is
investing in inflation-indexed bonds, which offer returns that rise with
inflation.
3. Economic Costs of High and Variable Inflation
High and unstable rates of inflation can impose major costs on an
economy. Businesses, workers, and consumers must factor in rising
prices when making purchasing, selling, and planning decisions,
creating an extra layer of complexity and uncertainty.
4. Uncertainty and Resource Misallocation
Since future inflation rates are hard to predict, economic agents may
make incorrect guesses. This uncertainty leads to wasted time and
resources spent on forecasting and adjusting behavior to keep pace
with rising prices, diverting attention from true economic
fundamentals and causing inefficiencies.
5. Challenges Even with Low and Stable Inflation
Even when inflation is low, stable, and predictable—conditions some
consider ideal—it can still cause problems. This is because the impact
depends on how, where, and when new money enters the economy,
affecting economic dynamics.
6. Effects of New Money Circulation
New money and credit initially enter the economy through specific
individuals or firms. As this money is spent and moves through the
economy, it causes sequential changes in prices, where some prices
rise before others, a phenomenon known as the Cantillon effect.
7. Distortions in Relative Prices and Economic Cycles
Inflation not only raises the general price level but also distorts relative
prices, wages, and returns. Economists widely agree that these
distortions move prices away from their natural economic equilibrium,
with Austrian economists particularly emphasizing that this distortion
can drive economic cycles and contribute to recessions.
HOW INFLATION CAN BE CONTROLLED
1. Role of Financial Regulators in Controlling Inflation
A country's financial regulator holds the key responsibility for managing
inflation. This is done through monetary policy, which involves actions by
the central bank or other committees to control the size and growth rate of
the money supply.
2. The Federal Reserve’s Monetary Policy Goals
In the U.S., the Federal Reserve’s (Fed) monetary policy goals are focused
on achieving moderate long-term interest rates, price stability, and
maximum employment. These goals aim to create a stable financial
environment, with the Fed clearly communicating long-term inflation
targets to maintain consistent inflation rates that benefit the economy.
3. Importance of Price Stability for Businesses
Maintaining price stability or a steady inflation rate allows businesses to
plan for the future with confidence. Predictable inflation helps companies
make informed decisions, promoting an environment that supports
maximum employment, although employment levels are also influenced by
non-monetary factors and thus fluctuate.
4. Understanding Maximum Employment
The Fed does not set a specific numerical goal for maximum employment,
as it depends largely on employers’ judgments and varies over time.
Maximum employment does not imply zero unemployment, since some job
turnover is always occurring as people leave and start new jobs.
5. Exceptional Measures During Economic Crises
In times of economic crisis, monetary authorities adopt extraordinary
measures. For example, after the 2008 financial crisis, the U.S. Fed lowered
interest rates to near zero and launched a bond-buying program known as
quantitative easing (QE) to stimulate the economy.
6. Effects of Quantitative Easing and Inflation Concerns
Although critics of QE feared it would lead to high inflation, inflation had
already peaked in 2007 and continued to fall over the next eight years. The
main reason QE did not trigger hyperinflation was the strong deflationary
pressures of the recession, with QE helping to counteract them.
7. Inflation Targets in the U.S. and Europe
U.S. policymakers have aimed to maintain an inflation rate of around 2%
per year. Similarly, the European Central Bank (ECB) has used aggressive
quantitative easing measures to fight deflation in the eurozone, with some
countries even experiencing negative interest rates to avoid economic
stagnation.
8. Inflation Tolerance in Growing Economies
Countries experiencing faster economic growth can tolerate higher
inflation rates. For example, India targets a 4% inflation rate with a
tolerance range between 2% and 6%, while Brazil aims for 3.25%, allowing
for fluctuations between 1.75% and 4.75%.
MEANING OF DEFLATION AND DISINFLATION
While a high inflation rate means that prices are increasing, a low
inflation rate does not mean that prices are falling. Counterintuitively,
when the inflation rate falls, prices are still increasing, but at a slower
rate than before. When the inflation rate falls (but remains positive),
this is known as disinflation.
Conversely, if the inflation rate becomes negative, that means that
prices are falling. This is known as deflation, which can have negative
effects on an economy. Because buying power increases over time,
consumers have less incentive to spend money in the short term,
resulting in falling economic activity.
EXAMPLES OF INFLATION
Since all global currencies are fiat money, political factors might cause
the money supply to grow quickly, which would raise prices quickly.
The hyperinflation that hit the German Weimar Republic in the early
1920s is the most well-known example.
The countries that won World War I wanted reparations from
Germany, but German paper money was of questionable value because
it was borrowed by the government. In an effort to pay off its
obligations, Germany tried printing paper money and using it to
purchase other currencies.
The German mark rapidly depreciated as a result of this policy, and the
trend was accompanied by hyperinflation. Given that their money
would lose value the longer they waited, German consumers reacted to
the cycle by attempting to spend it as quickly as feasible. People would
plaster their walls with essentially worthless bills as more money
flooded the economy and its value fell. Similar circumstances arose in
Zimbabwe in 2007 and 2008 and Peru in 1990.
IS INFLATION GOOD OR BAD?
Too much inflation is generally considered bad for an economy, while
too little inflation is also considered harmful. Many economists
advocate for a middle ground of low to moderate inflation, of around
2% per year.
Generally speaking, higher inflation harms savers because it erodes the
purchasing power of the money they have saved; however, it can
benefit borrowers because the inflation-adjusted value of their
outstanding debts shrinks over time.
WHAT ARE THE EFFECTS OF INFLATION ON THE
ECONOMY?
The economy can be impacted by inflation in a number of ways. For
instance, exporters may profit if inflation lowers a country's currency
since it will make their goods more affordable when sold in other
countries' currencies.
However, this could hurt importers by raising the cost of items created
abroad. Spending may also be stimulated by higher inflation since
buyers may want to buy products before their costs increase further.
Conversely, savers may witness a decline in the actual value of their
funds, which would restrict their future spending or investment
options.
WHY WAS INFLATION SO HIGH IN 2024?
Inflation has stayed high since 2022, when global inflation rates surged
to their highest points since the early 1980s. Although there isn’t a
single cause behind this sharp rise in prices worldwide, a combination
of factors came together to push inflation to such elevated levels.
The COVID-19 pandemic caused lockdowns and restrictions that
severely disrupted global supply chains, from factory shutdowns to
shipping delays at major ports. In response, governments provided
stimulus checks and boosted unemployment benefits to help
individuals and small businesses manage financially. Once vaccines
became widely available and the economy began to recover,
demand—partly driven by stimulus money and low interest
rates—quickly exceeded supply, which was still recovering from the
pandemic’s effects.
Russia’s unprovoked invasion of Ukraine in early 2022 triggered
economic sanctions and trade restrictions, limiting the global supply of
oil and gas, as Russia is a major fossil fuel producer. Food prices also
increased because Ukraine’s significant grain exports were blocked. As
energy and food prices climbed, these increases spread throughout the
value chains. In response, the Federal Reserve raised interest rates to
curb the high inflation, which declined notably in 2023 but remains
above pre-pandemic levels.
INFLATION IN INDIA
Inflation, or the rise in prices, has shaped India's economy over the
years. Before independence, wars and food shortages caused prices to
rise sharply. After 1947, inflation changed with new policies, wars, and
global events. In modern times, economic reforms and better control
by the government and RBI have helped keep inflation more stable.
Looking at India's inflation history shows how the country has grown
and adapted to new challenges.
1. Before Independence (Pre-1947):
● Colonial Economy: India was under British colonial rule. The
economy was primarily agrarian, with very little industrialization.
Inflation was relatively low and stable, but prices often fluctuated
sharply because of famine, wars, or agricultural failure.
● World War I (1914–1918): Inflation spiked as Britain printed more
money to finance the war. Food prices rose dramatically.
● The Great Depression (1929–1939): Global deflation affected India
too — prices of agricultural products crashed, farmers suffered
low incomes.
● World War II (1939–1945): Massive inflation hit India — money
supply expanded rapidly to fund British war efforts.
● Food scarcity and rationing started.
● Inflation peaked at over 30% during the early 1940s.
2. After Independence (1947–1991):
Post-1947: India inherited a fragile economy with shortages of food,
infrastructure damage, and partition-induced chaos.
1950s–1960s:
● Inflation remained moderate (around 5–7%) but was volatile.
● Government focused on Five-Year Plans, promoting agriculture
and industry.
● Green Revolution (late 1960s) boosted food grain production but
inflation spiked due to initial investment costs.
1970s:
● Severe inflation due to oil shocks (1973 oil crisis) and wars
(Indo-Pak wars).
● Inflation peaked at around 20% in 1974–75.
1980s:
● Moderate to high inflation (~7–10%).
● Government borrowed heavily; deficit financing led to steady price
rise.
End of 1980s:
● Economy faced a balance of payments crisis.
● Inflation pressures were building up towards the 1991 crisis.
3. Modern Day (1991–2025):
1991 Economic Reforms:
● India liberalized — opened up markets, reduced tariffs, privatized
many sectors.
● Inflation was brought under control initially, averaging around
7–8% in the 1990s.
2000s:
● Growth accelerated but inflation remained manageable (~5–6% on
average).
● Global crude oil prices, monsoon failures, and food price shocks
caused temporary spikes.
2008 Global Financial Crisis:
● Stimulus spending and supply chain disruptions pushed inflation
up temporarily.
2010–2013:
● High inflation (9–11%), especially food inflation (onions, pulses).
● Rupee depreciation and high fiscal deficits worsened it.
Post-2014 (Modi government):
● Stronger inflation targeting by Reserve Bank of India (RBI).
● Inflation gradually reduced to 4–6% range.
● RBI formally adopted Inflation Targeting Policy (keep CPI inflation
at 4% ± 2%).
COVID-19 Pandemic (2020–2021):
● Global supply shocks, lockdowns, and stimulus spending again
raised inflation risks.
2022–2024:
● War in Ukraine caused commodity price spikes (oil, wheat,
fertilizers).
● Inflation briefly went above 7% but has been brought down with
tight monetary policy.
2025 (Today):
● Inflation is relatively under control (~4–5%).
BIBLIOGRAPHY
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