With an increase in supply demand inceases. If supply fails to meet demand,inflation occurs.In 1980's inflation is considered a cause rather than an effect.Whilst now it appears as a result or a consequence rather than a cause,a cause can either be an increase in money supply or decrease in available goods.The way the perception of inflation changed over the years points out its importance in the present economic situation.India isn't a stranger to inflation, at first domestic factors caused inflation, now-a-days it is caused by global factors too. Global economy is in a state of extreme imbalance because of large scale consumption by developed western economies like the US.Asian currency crisis is another important factor which fuelled the global economic imbalance.During the crisis many countries engaged in competitive devaluation which leaded to accumulation of forgien exchange against their own currency.All those investors feared a fall in the value of dollar and reached out for various assets and commodities, therefore the prices of commodities and assets rose to new heights causing inflation.The incremental flow of forgien exchange into the country has resulted in increased credit flow.The sustained flow of foreign money and excessive global liquidity has fuelled the rise of stock market and real estate in india to unprecedented levels,this boom lead to corresponding boom in various markets as much as the increased credit flow has in a way resulted in overall inflation. Lower harvest is another nail in the coffin for india,wheat demand is expected to rise while the world production decreased. This global trend has put pressure on domestic prices and they are expected to continue during the course of the year.Inflation has some interesting facts,albeit the poor will be hurt by inflation it benefits the average middle class person with a large mortgage value,the biggest losers are obviously those who loan money.The US is therefore the biggest beneficiary of inflation as it is the biggest debtor in the world.One biggest disadvantage of inflation is fact that it discourages lending.Eventhough borrowers are the winners,government is the beneficiary,economy is the biggest loser.RBI's strategy of dealing with excessive liquidity through market stabilisation scheme(MSS) has its own limitations.One policy yet unexamined in the Indian context by the government is the exchange rate policy especially the revaluation of the Indian rupee as an instrument to control inflation.A higher rupee value than a dollar means lower purchase price of commodities in rupee terms.The government has to interfere in commodity markets which cause inflation and must ban exports, give import licenses , banning future trade etc.. to achieve a predictable and non volatile inflation of 3%. Low inflation volatility induces low volatile GDP growth.The effort or cost of bringing down inflation needs to be dispersed all across the economy.The export and import operations have to be properly mastered so that its nt concentrated to only a single field. There is something profoundly wrong about a government that interfers in what can be exported and what can be imported. For example,If the export of ball bearings were sometimes banned by the government, you can be sure there would be fewer factories to build ball bearings.The reserve bank failed to be a modern central bank which has the economic knowledge required to watch out for inflation in future and respond ahead of time.
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