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

Nomination for demat accounts and mutual fund folios

Securities and Exchange Board of India (SEBI) had revised the guidelines on nomination for demat accounts and mutual fund folios.   Which entities are covered by the guidelines? The following regulated entities (REs) are covered by the guidelines – Asset Management Companies (AMCs) of Mutual Funds (MFs) and their Registrars to an issue and share Transfer Agents (RTAs)  Association of Mutual Funds in India (AMFI)  Recognized Depositories  Registered Depository Participants (DPs) What are the guidelines on nomination facility? Nomination shall be mandatory for single holding and optional for jointly held accounts / folios. However, an investor having single holding / account / folio can opt-out of nomination, either online or through physical / offline mode. In case a joint account / folio becomes single holding, post the demise of holders, either nomination or ‘opt-out’, is mandatory. Investors shall have the option to specify guardians when nominees are minors....
Post a Comment
Read more

Framework for recognition of Self-Regulatory Organisation (SRO) for Payment System Operators (PSOs)

Reserve Bank of India (RBI) had released the framework for recognition of Self-Regulatory Organisation (SRO) for Payment System Operators (PSOs). What is the need of Self-Regulatory Organisation (SRO) for Payment System Operators (PSOs)? Industry self-governance helps in industry-wide smooth operations and ecosystem development. RBI’s Payment and Settlement Systems Vision 2019-21 had, therefore, envisaged the setting up of an SRO for PSOs. Accordingly, the framework for recognition of SRO for PSOs was released in October 2020. What shall be the role of SRO for PSOs? An SRO is a non-governmental organisation that sets and enforces rules and standards relating to the conduct of member entities in the industry, with the aim of protecting the customer and promoting ethical and professional standards.  The SRO is expected to resolve disputes among its members internally through mutually accepted processes to ensure that members operate in a disciplined environment and even accept penal ...
Post a Comment
Read more

Nomination Facility in Banks

Reserve Bank of India (RBI) has issued directions on nomination facility in deposit accounts, safe deposit lockers and articles kept in safe custody with the banks. What is the legal framework for nomination facility in banks? Banking Regulation Act, 1949 (BR Act) contain provisions on nomination facility in banks. Section 45ZA – Nomination for payment of depositors' money  Where a deposit is held by a banking company to the credit of one or more persons, the depositor / all the depositors together, may nominate one person to whom in the event of his / their death, the amount of deposit may be returned by the banking company. Where the nominee is a minor, the depositor shall appoint any person to receive the amount of deposit in the event of his death during the minority of the nominee. Section 45ZC – Nomination for return of articles kept in safe custody with banking company  Where any person leaves any article in safe custody with a banking company, such person may nominate ...
Post a Comment
Read more

Reserve Bank of India Act, 1934 – Part-V – Section 45B to 45JA

The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Reserve Bank of India (RBI). In a series of articles, we will briefly go through the provisions of RBI Act, 1934. This is the fifth article in the series.  Chapter IIIA - Collection and Furnishing of Credit Information Section 45B – Power of Bank to collect credit information RBI may collect credit information from banking companies and furnish it to any banking company in accordance with section 45D. Section 45C – Power to call for returns containing credit information RBI may direct any banking company to submit statements relating to credit information. Section 45D – Procedure for furnishing credit information to banking companies A banking company may apply to RBI to provide credit information. RBI shall furnish the requested credit information without disclosing the names of the banking companies which have submitted the information. RBI may levy fees of up to Rs.25 for furnishing credit...
Post a Comment
Read more

Reserve Bank of India Act, 1934 – Part-I – Preamble and Section 1 to 13

The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Reserve Bank of India (RBI). In a series of articles, we will briefly go through the provisions of RBI Act, 1934. This is the first article in the series. Preamble of the Act RBI to – Regulate the issue of bank notes. Keep reserves for monetary stability in India. Operate currency and credit system of the country to its advantage. The primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth. Chapter I – Preliminary Section 1 – Short title, extent and commencement 1(1) – This Act may be called the Reserve Bank of India Act, 1934. 1(2) – The Act extends to whole of India. Chapter II - Incorporation, Capital, Management and Business Section 3 – Establishment and incorporation of Reserve Bank 3(1) – RBI to take over management of the currency from the Central Government. 3(2) – RBI to have perpetual succession, common seal, and shall by...
Post a Comment
Read more