Skip to main content

What is inflation?

We often hear people talking about the rising prices and how they could buy more things earlier with the same amount of money. Containing inflation is also one of the prime goals of every government. But what is inflation?

What is inflation?

Inflation is a sustained / persistent rise in the general level of prices of (most of) the goods and services in the economy.

Why the prices rise?

The rise in prices is generally caused due to mismatch in the demand and supply of goods and services. Depending on the source / reason of the price rise, the inflation is categorised as –

  1. Demand-pull inflation
  2. Cost-push inflation

Demand-pull inflation

When the demand for goods and services is more than its supply, it creates an upward pressure on the prices. Such inflation is known as demand-pull inflation. The factors such as increasing population, rise in income levels, increase in money supply and liquidity in the economy, etc. lead to higher demand for goods and services. 

The central bank of a country plays an important role in managing the demand-pull inflation through its monetary policy by influencing the money supply and liquidity in the economy, thereby affecting the aggregate demand. 

Cost-push inflation

When the rise in prices is due to the supply side factors such as rise in cost of production, supply side disruptions, etc. it is known as cost-push inflation. 

The management of cost-push inflation needs intervention of the government through its fiscal policy measures like reducing taxes, providing subsidies, increasing supply through imports, ensuring smooth flow of supply chain, taking measures to increase production, etc. 

How is inflation measured in India?

In India, the inflation is measured by –

  1. Consumer Price Index (CPI)
  2. Wholesale Price Index (WPI) 

Consumer Price Index (CPI)

Consumer Price Index (CPI) measures the inflation in terms of retail prices of various goods and services. The National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI), Government of India, releases CPI numbers in India (Base Year: 2012).

Sub-indices of CPI –

  1. CPI-Combined (base year 2012)
  2. CPI-Rural (base year 2012)
  3. CPI-Urban (base year 2012)
  4. CPI-Industrial Workers (IW) (base year 2001)
  5. CPI-Agricultural Labourers (base year 1986-87)
  6. CPI-Rural Labourers (base year 1986-87)

Constituents of CPI-Combined –

Constituent Weight
Food and beverages 45.86%
Pan, tobacco and intoxicants 2.38%
Clothing and footwear 6.53%
Housing 10.07%
Fuel and light 6.84%
Miscellaneous 28.32%

Wholesale Price Index (WPI) 

Wholesale Price Index (WPI) measures the inflation in terms of wholesale prices of various goods and services. The Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade (DPIIT), Government of India, releases WPI numbers in India (Base Year: 2011-12). Provisional figures of WPI for a month are released on the 14th (or next working day) of the next month and compiled with data received from institutional sources and selected manufacturing units across the country. After 10 weeks, the index is finalized, and final figures are released and then frozen thereafter.

Constituents of WPI –

Constituent Weight
Primary Articles 22.62%
Fuel & Power 13.15%
Manufactured Products 64.23%
Food Index 24.38%

Is inflation good?

It is said that a reasonable rise in prices is good for the economy as it provides an incentive to the producers to produce more, leading to more production and income in the economy. The increased income also enables people to bear the rise in prices. However, if the rate of increase in prices is more than the rate of rise in incomes, it begins to hurt. Also, the uncertainty caused by rapid rise in prices results in producers postponing their investment and production decision, thereby adversely affecting the economy.

What are the commonly used inflation terminologies?

  • Headline inflation – general rise in prices of goods and services for eg. CPI-Combined and WPI
  • Core inflation – general rise in prices of goods and services excluding that of food and energy
  • Food inflation – increase in food prices
  • Sticky inflation – a situation of high inflation and stagnant growth
  • Shrinkflation – where the price of a unit of a product remains the same, however, the quantity / weight of the unit reduces
  • Hyper / runaway inflation – very rapid rise in prices
  • Galloping / hopping inflation – prices increasing in arithmetic or geometric progression
  • Creeping inflation – slow / gradual increase in prices 
  • Dis-inflation / Deflation – fall in prices and rise in unemployment
  • Stagflation – a situation of rising both inflation and unemployment, and low growth

What is inflation spiral?

Inflation spiral is a situation where the rise in prices results in demand for higher wages, resulting in increased cost of production and rise in prices (cost-push inflation), further leading to demand for higher wages.

Follow at - Telegram   Instagram   LinkedIn   Twitter

Labels:

Comments

Post a Comment

Popular Posts

Credit Cards and Debit Cards

Reserve Bank of India (RBI) has issued directions on issuance of credit cards and debit cards. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Non-Banking Financial Companies (NBFCs) for all layers – NBFC-Investment and Credit Companies (NBFC-ICC) NBFC-Factor  NBFC-Micro Finance Institutions (NBFC-MFI)  Housing Finance Company (HFC)  What is a credit card? Credit Card is a physical / virtual payment instrument issued with a pre-approved revolving credit limit that can be used to purchase goods and services or draw cash advances. What is a debit card? Debit Card is a physical / virtual payment instrument linked to a Savings Bank / Current Account which can be used to withdraw cash, make online payments, do Point of Sale (PoS) terminal / Quick Response (QR) code transactions, fund transfer, e...
Post a Comment
Read more

Deposits between a person resident in India and a person resident outside India

Reserve Bank of India (RBI) has updated the regulations on deposits between a person resident in India and a person resident outside India. What are the restrictions on deposits between a person resident in India and a person resident outside India? No person resident in India shall accept any deposit from, or make any deposit with, a person resident outside India. However, the following deposits are exempted – Deposits held in rupee accounts maintained by foreign diplomatic missions and diplomatic personnel and their family members in India with an authorised dealer. Deposits held by diplomatic missions and diplomatic personnel in special rupee accounts namely Diplomatic Bond Stores Account to facilitate purchases of bonded stocks from firms and companies who have been granted special facilities by customs authorities for import of stores into bond. The funds in the account may be repatriated outside India without the approval of the RBI. Deposits held in accounts maintained in foreig...
Post a Comment
Read more

Credit Derivatives

Reserve Bank of India (RBI) has issued directions on credit derivatives. What is Credit Derivative? Credit derivative means a derivative contract whose value is derived from the credit risk of an underlying debt instrument or an index of underlying debt instruments. What is Credit Default Swap (CDS) and Total Return Swap (TRS)? Credit Default Swap (CDS) means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event with respect to a reference entity and in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier. Total Return Swap (TRS) means a credit derivative contract under which one counterparty (total return payer) commits to transfer the entire economic performance of a reference asset to the other counterparty (total return receiver), and, in return, receives a pre-d...
Post a Comment
Read more

Payment of Agency Commission to Agency Banks (ABs) and Disbursement of Government Pension by ABs

Reserve Bank of India (RBI) has issued guidelines on the conduct of Government business by Agency Banks (ABs), payment of agency commission to ABs and disbursement of Government pension by ABs. Who are ABs? ABs mean all Public Sector Banks (PSBs), scheduled Private Sector Banks (PVBs), scheduled Payments Banks (PBs), and scheduled Small Finance Banks (SFBs) appointed by the RBI under Section 45 of the RBI Act, 1934, by mutual agreement, to carry out Government banking business of the Central Government (CG) / State Governments (SGs). What is agency commission? Agency commission means the remuneration paid by the RBI to an AB in consideration of it acting as an agent of the RBI in the conduct of general banking business of the CG and the SGs at the places and in the manner specified in the agreement between the RBI and the bank, with the exception of the functions relating to the management of the public debt. What are the guidelines on appointment of ABs? Any eligible bank which intend...
Post a Comment
Read more

Special Rupee Vostro Accounts (SRVAs)

Reserve Bank of India (RBI) has consolidated the guidelines governing Special Rupee Vostro Accounts (SRVAs). Who can open and maintain Special Rupee Vostro Accounts (SRVAs)? Authorised Dealer (AD) banks in India may open Special Rupee Vostro Accounts (SRVAs) of its branch outside India or a bank resident outside India. Which transactions can be settled through SRVA? The settlement of cross-border trade transactions through SRVA is an additional arrangement for invoicing, payment and settlement of exports and imports in Indian Rupee (INR).  All permissible capital and current account transactions under Foreign Exchange Management Act (FEMA) may be settled through the SRVA.  AD banks maintaining SRVA are permitted to open additional current account for exporter / importer, exclusively for settlement of export / import transactions. What can be the source and use of funds in SRVA? SRVA may be funded by way of inward remittances or transfer from other repatriable INR accounts in t...
Post a Comment
Read more