Inflation in Economy

INTRODUCTION
DEFINATION OF INFLATION.

Understanding inflation is crucial to investing because inflation can reduce the value of investment returns. Inflation affects all aspects of the economy, from consumer spending, business investment and employment rates, to government programs, tax policies, and interest rates
What is Inflation?

‘Inflation is a sustained rise in overall price levels. Moderate inflation is associated with economic growth, while high inflation can signal an overheated economy’

‘OR’

‘The percentage increase in the price of goods and services, usually annually

causing purchasing power to fall’

Price increases powerfully assist in reducing demand and increasing supply

that inflation can be brought to a halt.



By defining inflation simplistically in terms of the current rate of price increases - economists, politicians, and others with vested interests in the continuance of the policies actually causing inflation can pretend that inflation doesn't exist or can minimize its extent for the long periods when inflationary forces manifest themselves in ways other than in pushing prices higher.

Inflation, measured by the Consumer Price Index and the Producer Price Index. But there are different types of inflation, depending on its cause. Here we examine cost-push inflation and demand-pull inflation.

Factors of Inflation

Inflation is defined as the rate (%) at which the general price level of goods and services is rising, This is different from a rise and fall in the price of a particular good or service. Individual prices rise and fall all the time in a market economy, reflecting consumer choices or preferences and changing costs. So if the cost of one item, say a particular model car, increases because demand for it is high, this is not considered inflation. Inflation occurs when most prices are rising by some degree across the whole economy. This is caused by four possible factors, each of which is related to basic economic principles of changes in supply and demand:

Increase in the money supply.

Decrease in the demand for money. decrease in the aggregate supply of goods and services.

Increase in the aggregate demand for goods and services.

In this look at what inflation is and how it works, we will ignore the effects of money supply on inflation and concentrate specifically on the effects of aggregate supply and demand: cost-push and demand-pull inflation.
Types of Inflation


There are two types of inflation.

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Demand –Pull Inflation.
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Cost-Push I nflation.


Demand-Pull Inflation;

Demand-pull inflation arises when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods". since only money that is spent on goods and services can cause inflation. This would not be expected to persist over time due to increases in supply, unless the economy is already at a full employment level.



Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the macroeconomy: households, businesses, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, they compete to purchase limited amounts of goods and services. Buyers in essence “bid prices up”, causing inflation.





Demand-pull inflation explains why certain items or services rise in price even when they appear to be in plentiful supply. A booming economy means that factories are hiring more workers and those workers are producing more products. However, these additional employees are also earning more money and want to spend that money on products they may not have able to afford while unemployed or underemployed. Because the demand for these products rises but the supply cannot be increased fast enough to meet it, the price of the products often rises. This price rise during seemingly strong economic times is called demand-pull inflation by those who ascribe to the Keynesian economics model.



Factors Pulling Prices Up

The increase in aggregate demand that causes demand-pull inflation can be the result of various economic dynamics. For example, an increase in government purchases can increase aggregate demand, thus pulling up prices. Another factor can be the depreciation of local exchange rates, which raises the price of imports and, for foreigners, reduces the price of exports. As a result, the purchasing of imports decreases while the buying of exports by foreigners increases, thereby raising the overall level of aggregate demand (we are assuming aggregate supply cannot keep up with aggregate demand as a result of full employment in the economy). Rapid overseas growth can also ignite an increase in demand as more exports are consumed by foreigners. Finally, if government reduces taxes, households are left with more disposable income in their pockets. This in turn leads to increased consumer spending, thus increasing aggregate demand and eventually causing demand-pull inflation. The results of reduced taxes can lead also to growing consumer confidence in the local economy, which further increases aggregate demand.




Cost-Push Inflation

Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation. Cost-push inflation basically means that prices have been “pushed up” by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation).


Production Costs

To understand better their effect on inflation, let’s take a look into how and why production costs can change. A company may need to increases wages if laborers demand higher salaries (due to increasing prices and thus cost of living) or if labor becomes more specialized. If the cost of labor, a factor of production, increases, the company has to allocate more resources to pay for the creation of its goods or services. To continue to maintain (or increase) profit margins, the company passes the increased costs of production on to the consumer, making retail prices higher. Along with increasing sales, increasing prices is a way for companies to constantly increase their bottom lines and essentially grow. Another factor that can cause increases in production costs is a rise in the price of raw materials. This could occur because of scarcity of raw materials, an increase in the cost of labor and/or an increase in the cost of importing raw materials and labor (if the they are overseas), which is caused by a depreciation in their home currency. The government may also increase taxes to cover higher fuel and energy costs, forcing companies to allocate more resources to paying taxes.



A situation that has been often cited of this was the oil crisis of the 1970s, which some economists see as a major cause of the inflation experienced in the Western world in that decade. It is argued that this inflation resulted from increases in the cost of petroleum imposed by the member states of OPEC. Since petroleum is so important to industrialized economies, a large increase in its price can lead to the increase in the price of most products, raising the inflation rate. This can raise the normal or built-in inflation rate, reflecting adaptive expectations and the price/wage spiral, so that a supply shock can have persistent effects.


Deflation And Disinflation.


Deflation;

What is Deflation

In common usage deflation is generally considered to be "falling prices". But there is much more to it than that. Often people confuse deflation with disinflation or with Depression (as in "the Great Depression"). These three terms are related but not synonymous.



The definition of Deflation is "a decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. The opposite of inflation."


What Causes Deflation?

Although everything said above is true it doesn't present the true nature of deflation. It tries to define it by presenting several possible causes. For a true understanding of both Inflation and Deflation we need to understand Supply and Demand. Just like every other commodity there is a supply of and a demand for "Money".



In this article I am not going to address the issues of what true money is, for the sake of this article we will assume money is simply something other people are willing to accept in exchange for goods or services.



Price levels are the direct result of the relationship between the supply and the demand for any given item. But the value of the money used to pay for those items is also subject to the same relationship.



For the sake of simplicity let's assume that we are on an island and there are ten equally desirable goods in our universe and ten $1.00 bills available to purchase them with. We can safely assume that each item will end up costing $1.00 each.



If the quantity of money increases to $20 (without increasing the quantity of goods) the price of the goods will increase to $2.00 - that is inflation.



If, however, the quantity of money decreases to $5.00 the price will fall to 50¢ (deflation). This is what the first part of the above definition is referring to. The money supply can also be reduced if someone on our island hoards half of it and refuses to spend it on anything no matter what. This is the second part of the definition (reduction in spending).



So far we have only looked at part of the equation, the supply of money. But what happens if the quantity of goods available increases? What if instead of having ten items we build ten more? We now have twenty items and only $10. 00 so once again each item is worth 50¢.



This form of deflation is the good type. Everyone assumes that deflation is bad because the last major deflation that we had was during the "Great Depression" so deflation and Depression are synonymous in many peoples minds. In actuality if prices go down because the goods can be manufactured more cheaply this ends up increasing everyone's wealth.



This is exactly what happened in the late 1990s , with cheap productivity available from former Communist countries the quantity of goods is increased while the money supply increased at a slower rate.
what about Demand?

What about the demand for goods? If everyone on our island already has one of the items available and no one needs any more, naturally the price will also fall as sellers try to find someone to take them off their hands.



So far we have dealt with the supply of money, the supply of goods and the demand for goods, but what about the demand for money?



Is it possible that the demand for money could increase or decrease? Generally, the demand for money is measured by how much people are willing to pay to borrow it (i.e. interest rates). If inflation is high, interest rates will have to be higher to compensate for the loss of purchasing power. But also if the demand for money rises banks can charge more to loan it. Conversely, if the demand for money falls interest rates will also fall.




Disinflation.



. Often people confuse disinflation with deflation. Perhaps because they think disinflation is the opposite of inflation.



This however is not the case, in some ways disinflation is kind of like baby inflation. In disinflation, prices have not fallen which would be the opposite of rising prices they have simply stopped rising as fast as they once were.

"Disinflation" means that prices are not rising as fast as they once were



Inflation is measured by an index called the "consumer price index" and the percentage change in this index from one year to the next is commonly called the inflation rate. This is a measure of price inflation

Exmple. if the inflation rate is 5% one month (for the previous 12 months) and the following month it drops to 4% (for the previous 12 months) we have experienced 1% disinflation.



Note that 11 of the monthly periods in this example overlap so the major difference occurred between the first month of the first period and the last month of the second period..



Deflation on the other hand is where prices have stopped rising altogether and are actually falling. So in our example we had an inflation rate of 5% when the rate dropped to 4% we had disinflation and if it dropped all the way to a negative 1% (-1%) we would then have deflation.



Recently we have experienced deflation in the price of gasoline as it went from over $4.00/gal down to $2.00/gal. we have had 50% deflation in the price of gasoline.



Spotting disinflation in the real world is much more difficult. If the price of gasoline was $4.00 one month and $4.40 the following month we could recognize a monthly inflation rate of 10%.



If the following month the price was $4.62 we would say prices inflated by 5% this month because they were up 5%. We wouldn't say that they disinflated by 5% because they rose 5% less than the month before.




STAGFLATION.

Stagflation- What is it? And why is it so Bad?


Stagflation

The simple definition of Stagflation is a "stagnant economy coupled with price inflation".



In other words, in stagflation prices are going up while the economy is going down. The word was coined during the inflationary period of the 1970's.



Under normal conditions one would expect inflation to heat up the economy. That is one reason the FED generally increases interest rates during periods of higher inflation. This helps to cool the economy and prevent inflation from spiraling out of control.



the primary cause of inflation is an increase in the money supply.



So clamping down on interest rates is kind of like stomping on the accelerator with one foot (increasing the money supply) and stomping on the brakes with the other (increasing interest rates).



The net effect is not good for your car. In the same way it doesn't help the economy either. But we digress (back to stagflation).



Remember, under normal circumstances increasing inflation equals an increasing economy as all that new money begins flowing around.



But in the 1970's we saw something unusual, inflation and a recession at the same time. This was so unusual that they coined a new term "stagflation" to describe the situation.



Basically, what happened in stagflation was that there was plenty of liquidity in the system and people were spending money as quickly as they got it because prices were going up quickly, (price inflation).



But the rapid price increases in the price of oil caused many businesses to become unprofitable, so they began laying off workers. This threw the economy into a tailspin as unemployment grew in spite of an increase in the money supply.



The end result was stagflation, i.e. price inflation and high unemployment and a disastrous economy. Finally, the FED cut the money supply, oil prices moderated, and the economy was able to get back on it's feet.



The major problem with stagflation is that the normal methods of increasing interest rates doesn't help the situation. The only reason it helps in times of high economic activity is because it slows the "velocity of money" or the speed at which it changes hands.



In contrast, when the economy is weak the standard medicine administered by the FED is to lower interest rates to stimulate the economy. Unfortunately, it is impossible to stimulate the economy by lowering rates while simultaneously fighting inflation by raising rates.



So there is the catch. What do you do in Stagflation? Well at this point the Government is forced to face the real problem (which isn't interest rates at all but the money supply). It has to reduce the money supply and get the economy back on a firm footing.



That is what finally happened in the early 1980's and that is what is happening now, although not by choice as the market collapses and banks fail the money supply and the velocity of money is contracting.



The current situation is a result of years of inflation because low foreign wages and high demand for US paper debt, were able to keep a cap on our inflation. But finally higher oil prices are igniting the old fires of inflation while the sub-prime mess is unraveling the economy placing us in much the same situation as in the 1970s.



Unfortunately, currently the FED is still in denial about the stagflation situation and is trying to lower interest rates and increase the money supply by using massive bailouts, to fight the stalling economy and it isn't doing very well.


Effects of inflation

The negative impacts of inflation are as follows,



Inflation destroys the assumption that money is stable which is the basis of classic accountancy.]

Cost-push inflation: Rising inflation can prompt trade unions to demand higher wages, to keep up with consumer prices. Rising wages in turn can help fuel inflation.

Hoarding: people buy consumer durables as stores of wealth in the absence of viable alternatives as a means of getting rid of excess cash before it is devalued, creating shortages of the hoarded objects.

Hyperinflatnion: if inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply.

Allocative efficiency: a change in the supply or demand for a good will normally cause its price to change, signalling to buyers and sellers that they should re-allocate resources in response to the new market conditions. But when prices are constantly changing due to inflation, genuine price signals get lost in the noise, so agents are slow to respond to them. The result is a loss of allocative efficiency.

Shoe leather cost: High inflation increases the opportunity cost of holding cash balances and can induce people to hold a greater portion of their assets in interest paying accounts.

Menu costs: With high inflation, firms must change their prices often in order to keep up with economy wide changes. But often changing prices is itself a costly activity whether explicitly, as with the need to print new menus, or implicitly.
POSITIVES EFFECTS.

Some possibly positive effects of (moderate) inflation include:



Labor Market Adjustments: Keynesians believe that nominal wages are slow to adjust downwards. This can lead to prolonged disequilibrium and high unemployment in the labor market. Since inflation would lower the real wage if nominal wages are kept constant, Keynesian argue that some inflation is good for the economy, as it would allow labor markets to reach equilibrium faster.

Room to maneuver: The primary tools for controlling the money supply are the ability to set the discount rate, the rate at which banks can borrow from the central bank, and open market operations which are the central bank's interventions into the bonds market with the aim of affecting the nominal interest rate. If an economy finds itself in a recession with already low, or even zero, nominal interest rates, then the bank cannot cut these rates further (since negative nominal interest rates are impossible) in order to stimulate the economy - this situation is known as a liquidity trap. A moderate level of inflation tends to ensure that nominal interest rates stay sufficiently above zero so that if the need arises the bank can cut the nominal interest rate.



Tobin effect: The Nobel prize winning economist James Tobin at one point had argued that a moderate level of inflation can increase investment in an economy leading to faster growth or at least higher steady state level of income. This is due to the fact that inflation lowers the return on monetary.




























ROLE OF FISCAL AND MONETRY POLIES IN CONTROLLING INFLATION;
FISCAL POLICY;

Fiscal policy is concerned with following instrument.



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Government Expenditure
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Taxes
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Deficit financing.
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Subsidies.
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Transfer payment.



Government control inflation by using these instruments.it do it by increasing taxes,and by decreasing expenditure,transfer of payments.


MONETRY POLICY;



This policy contains those methods which physically affect the amount of credit creation in the economy they are as,

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Changes in the bank rate policy.

The rate at which central bank of the country gives loan to commercial bank known as bank rate.Central bank increase this ratio to control inflation

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Open market operation

Under this operation central bank sells the government securities to control inflation

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Changes in reserve requirement

Commercial bank has to keep certain proportion of its deposits with central bank to control inflation central bank increase this ratio


INFLATION IN ASIA.

Asian inflation has risen sharply but could begin to peak in Q3 2008. Inflation rates in key Asian economies have risen to levels not seen in years. The CPI in Vietnam, Sri Lanka and Pakistan has risen to almost 30% yoy while in the Philippines, Indonesia, and India it is in the lower double-digits. Countries such as China, Singapore, and Thailand are also seeing headline CPI near 10%.

We expect inflation to remain at elevated levels over the medium term, A recent business survey conducted by the Economist Intelligence Unit found that employers from China and Southeast Asia cited the shortage of qualified personnel as their number one business concern. Anecdotal evidence suggests that within 5 years, western-style salaries may be required in developing Asia to attract talent.

More affluent Asian consumers are pushing commodity prices higher. l. Demand is expected to continue to rise in developing Asian economies that have large “catch-up” potential in food and meat consumption. For instance, China’s meat consumption is currently only 20% of the per-capita meat consumption in the US. Most agricultural commodities have not reached their all-time highs so there is still significant headroom for prices to continue to rise.

Tighter monetary policy ahead. Some central banks in Asia have already been raising interest rates (India, Indonesia, Philippines, Pakistan, Taiwan, Thailand, Vietnam) and more are expected to follow suit. This is partly due to negative real interest rates..

Growth slowdown in 2008 (to continue into 2009?). Higher interest rates in 2008 are likely to have a negative impact on real GDP growth via lower growth in investment and consumption. We expect the slowdown in 2008 to be relatively manageable for most NJA economies, cushioned by accumulated FX reserves and fiscal surpluses for several countries. Real GDP growth in 2009 should stay fairly resilient compared with the 2008 level. Inflation expectations are still well anchored. Theoretically, substantially higher inflation expectations might even increase today’s consumption because consumers fear further losses in purchasing power.




Conclusion





Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the major part of the population. It needs to be controlled by strategic planning. Domestic production should be encouraged instead of imports; investment should be given preference in consumer goods instead of luxuries, Agriculture sector should be given subsidies, foreign investment should be attracted, and developed countries should be requested for financial and managerial assistance. And lastly a strong monitoring system should be established on different levels in order to have a sound evaluation of the process at every stage.

How to Choose a Structural Engineering Consultant?

Are you looking for structural engineering consultant? Outsourcing some of your non-core activities like structural engineering design, steel shop drawings, 2D-3D structural modeling, etc to structural engineering consultants can help you significantly on both fronts – price and competitiveness.

Outsourcing structural engineering projects is a buzz-word in construction and engineering industry. Offshore structural engineering consultants based in India, Germany and other outsourcing countries have large pool of structural engineers, steel detailers and CAD operators who can work on flexible pricing models (fixed or man-hour basis). Outsourcing structural related projects help you to reduce costs and gain efficiencies by leveraging the talent, technology and expertise of third party vendors and hence focus 100% on your core business activities. General structural engineering functions chosen for outsourcing are structural drafting, structural steel design, steel shop drawings, steel detailing, 3D modeling, construction documents etc.

If you are planning to hire a structural engineering consultant, you are essentially choosing a business partner for your company. The vendor should work in accordance with your business needs and have the same type of work ethics and commitment to success.
Some basic tips on deciding upon your offshore structural engineering consultant:

1. Don’t wait until you need a professional consultant. It’s always a right time to find out outsourcing companies that has the kind of skills and experience you require.

2. Be crystal clear about what you want. Communicate about your project needs, expectations, charges and timelines to your structural engineering consultants.

3. Hire a company which helps you to find out the talent you need. Check out several structural engineering companies yourself.

4. Look for flexible structural consultants which are capable of harnessing many talents.

5. Identify structural engineering consultants in developing countries like India who have adequate experience of managing outsourced projects.

6. Choosing right talent and price is tricky. Ask for testimonials and samples the services before hiring.
Hiring structural engineering consultant is not about saving costs and time. It is about how to manage things quicker, more effectively and gain access to highly skilled professionals and leverage core activities leaving your competition way behind in the market.

Make Your Business Run More Smoothly

You want your business to run as smoothly as possible - and much of that comes down to organisation structure and diligence on your part. But while you and your employees’ actions play a massive role in driving your business forward, there are many tools designed to simplify the functionality of your business.

When it comes to making your business run more smoothly, there are number of products out there dedicated to the task. But much of the time, business owners either invest in tools that aren’t totally specific to their business, or they become overwhelmed by the sheer choice of products on the market. So, what are some of the most common tools designed to drive seamless business functionality, and could they be right for your business?

One of the best qualities to look for in a business tool is versatility. In other words, if you can get an ‘all-in-one’ type of tool that combines various functions you’ll be able to benefit more from your investment - not to mention save money in the long run. One example of such a tool is an ‘all-in-one’ printer that combines a printer, scanner, copy machine, fax machine, and even a phone. Such a tool would end up costing a company far less than if each of those products were invested in separately. Moreover, all-in-one printers come in handy for all types of business, placing them among the most popular - and versatile - business tools on the market.

Another tool that business can’t go wrong with is the franking machine. Franking machines eliminate the need for individual envelope stamping, and they certainly take the guess work out of postage pricing for envelopes of various weight and sizes. All one needs to do with a franking machine is specify where in the world the envelope or small package needs to be delivered to, and the type of delivery it requires. Then, placing the envelope or the package on the scale, the franking machine records a weight and administers the correct postage - ready for your postal service provider to pick up.

Aside from convenience and time-saving qualities, franking machines enable better tracking of postage costs within your company because they require users to add a postage balance on to the meter. So you’ll know exactly how much credit is being placed, and how far that amount takes your business postal needs.

Above all, the important thing to consider when contemplating a business tool is whether your business will truly get good use out of the product. There are a number of great, innovative products out there - but if you’re not utilising a product, you’re not getting value out of it. Therefore, consider purchasing both versatile products and tools you’ll get significant use out of, and you’re bound to help your business run more smoothly - the smart way.

Challenges of Managing a Bilingual Call Center

The Spanish-speaking population in the world exceeds that of English-speaking and their buying power has a significant impact on the global economy. Businesses that manage advertising campaigns to generate interest in what they produce must have a collection center or information contact center to mange customer requests. This applies to organizations; financial services, banks, technology companies, hotels etc. and they are increasingly relying on the expertise of bilingual call centers. Some of the largest corporations employ bilingual call center facilities to manage the workflow of the internal communication as well.

Professionals involved in managing bilingual call center staffs would agree that they are faced with many challenges. Perhaps, their greatest challenge is managing the workforce. Ensuring efficiency, training employees and having a good turnaround rate requires professionals who are skilled. Attaining this objective requires good planning and skilled execution in all kinds of services.

1. Hiring Spanish staff for bilingual call centers can be more challenging than it appears since most Spanish speakers in U.S are immigrants or first, second or third generation Americans. The challenge this provides in the workplace is that conversations at home are generally colloquial. Speaking to family and friends is very different from conducting a telephonic conversation with a customer. Language and accent problems greatly affect bilingual call center’s success.

2. Bilingual customer service representatives also encounter other problems in their work environment like use of accurate terminology and phrasing to describe new product features, describe payment options, cross-sell another product etc. Without appropriate training, they often make errors and become frustrated in their conversation with customers. This negatively affects customer’s perception of your company and brand.

3. Spanish conversation between people from different backgrounds sometimes complicates business communication. More than 20 countries in the world speak Spanish using a wide variety of pronunciation, accents, dialects and vocabulary. Often employees and customers misunderstood each other on a certain point.

4. Bilingual employees who interact with Spanish speaking customers must be able to communicate in business Spanish as well as understand the geo-demographic diversity of Hispanics in U.S. Unfortunately, many call centers train their bilingual personnel in English and then require their employees to ‘translate that into Spanish’. Without appropriate in-language training in the specialized vocabulary, these employees are at a disadvantage in communicating with their customers.

Tips

1. Provide your staff/employees with a better understanding of the culture and the geo-demographic diversity of US Hispanics by-

* Improving the understanding of the Hispanic culture for those who interact with Spanish-speaking customers
* Increasing the appreciation of Spanish-speaking people, their roots, tradition, history, cultures and languages
* Becoming more aware of how the Spanish language is used by US Hispanics. 2. The best way of hiring the qualified Spanish candidates for bilingual call centers is by using language proficiency assessments that tests verbal communication, reading comprehension, writing skills to evaluate the competency of the Spanish speaker.

3. Provide the bilingual employees Business Spanish in-language training serving Hispanic consumers such as vocabulary and industry specific terms and phrases, how to handle difficult customers and techniques to handle the cultural diversity of Spanish speakers in the U.S.

4. It is important for bilingual call center management to stay current on call center news and trends to improve performance. This helps them to plan a customer service program that works for both their employees and customers.

Spanish speakers are becoming a very significant part of workforce and they need to be trained properly in their native language. Providing and achieving quality customer service through bilingual call centers requires a plan, adequate budget, fully trained staffs and appropriate Spanish language training.