Friday, November 24, 2006

Inflation: taxes without legislation

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Inflation is one form of taxation that can be imposed without legislation, says Friedman. Inflation is not just a persistent increase in the level of consumer prices but a persistent decline in the purchasing power of money.

It is caused by an increase in available currency and credit beyond the proportion of available goods and services.

It is said that Inflation stimulates business and helps wages to rise, but the increase in wages usually fails to match the increase in prices; hence, real wages diminish.

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

Let's take an update on the current inflation trends. The Wholesale Price index (WPI) inflation was up to 5.30 % in the first week of November which is on an upside. More alarming is the continued rise in the food prices where the inflation is higher at 6.8%.

The measurement of the price level is a difficult task and, therefore, so is the measurement of the inflation rate. For example, many economists believe that the consumer price index has overstated the rate of inflation in recent decades because improvements in the quality of goods and services are not adequately reflected in the index. An index that held quality constant, according to this view, would show a smaller rate of price increase from year to year, and thus a smaller average rate of inflation.

It is important to recognize that a positive rate of inflation, as measured by a price index, does not mean that all prices have increased by the same proportion. Some prices may rise relative to others. Some might even fall in absolute terms, and yet, on average, inflation is still positive.

In the Indian context what are the factors influencing the rate of inflation? According to what I read in the papers, it should be the oil prices, our erratic monsoon, RBI's monetary policies, credit and money supply and maybe the statistical base taken for calculation of the inflation rate.
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