Inflation : Definition, WPI, CPI,
Measurement and Causes
Inflation is defined as a situation where there is sustained, unchecked
increase in the general price level and a fall in the purchasing power of
money. Thus, inflation is a condition of price rise. The reason for price rise
can be classified under two main heads : (1) Increase in demand (2)
Reduced supply.
Inflation explained with an example:
Suppose for Rs.100, last week you bought 5 Kg. of rice. This means that
the cost of 1Kg of rice was Rs. 20. This week when you approached the
same shop-keeper and paid Rs.100 to get rice, he gave only 4 Kg of rice. He
also explained that the price of rice has increased, and now it is Rs.25 per
Kg.
This example clearly explains the fall in the purchasing power of money.
For Rs. 100 you could get 5 Kg rice before, but now only 4 Kg. So the
purchasing power of money got reduced. This is inflation. And let's
calculate the inflation rate (percentage). If the price of rice, which was
Rs.20 per Kg increased to Rs.25, this corresponds to Rs.5 increase on
Rs.20, ie. 25% increase. So the inflation rate is 25%, which is obviously a
very high rate.
Problems with Inflation:
Having understood what inflation really is, let’s ponder what effects can
inflation cause in an economy? Is inflation that bad? High rates of inflation
is bad because it can eat up the hard-earned money of ordinary people. Life
of a common man will become tough. His savings will soon be exhausted,
unless his investments offer a higher rate of return than the inflation rate
present in the country.
, Inflation Rates in India
There are different indices in India like Wholesale Price Index(WPI),
Consumer Price Index(CPI) etc which measure inflation rates in India. But
what we generally find in headlines as inflation rate in India is Inflation rate
based on WPI. In the last 50 years, WPI based inflation rate shows an
average inflation rate around 7-8%. The highest inflation rate observed in
India was 34.68 Percent in September of 1974. The lowest rate touched
was -11.31 Percent in May of 1976 ( a case of deflation).
How to measure Inflation rate?
Unchecked inflation can ruin the whole economy. There are many examples
from African and South American economies which got shattered by the
high inflation rates. But who measures the inflation rate in India? And what
are the types of Inflation indices in India? Let’s study each of them.
Inflation can be measured at three levels – producer, wholesaler and
retailer (consumer). Prices generally rise in each level till the commodity
finally reaches the hand of the consumer.
Inflation at Producer Level
As of now in India, there is no index to measure inflation at producer level.
A Producer Price Index (PPI) is proposed, but so far this type of inflation
calculation has not started in India.
Inflation at Wholesale Level
This is the most popular inflation rate calculation methodology in India. The
index used to calculate wholesale inflation is known as Wholesale Price
Index (WPI). This inflation rate is often known as headline inflation. WPI is
released by the Ministry of Commerce and Industry.
Measurement and Causes
Inflation is defined as a situation where there is sustained, unchecked
increase in the general price level and a fall in the purchasing power of
money. Thus, inflation is a condition of price rise. The reason for price rise
can be classified under two main heads : (1) Increase in demand (2)
Reduced supply.
Inflation explained with an example:
Suppose for Rs.100, last week you bought 5 Kg. of rice. This means that
the cost of 1Kg of rice was Rs. 20. This week when you approached the
same shop-keeper and paid Rs.100 to get rice, he gave only 4 Kg of rice. He
also explained that the price of rice has increased, and now it is Rs.25 per
Kg.
This example clearly explains the fall in the purchasing power of money.
For Rs. 100 you could get 5 Kg rice before, but now only 4 Kg. So the
purchasing power of money got reduced. This is inflation. And let's
calculate the inflation rate (percentage). If the price of rice, which was
Rs.20 per Kg increased to Rs.25, this corresponds to Rs.5 increase on
Rs.20, ie. 25% increase. So the inflation rate is 25%, which is obviously a
very high rate.
Problems with Inflation:
Having understood what inflation really is, let’s ponder what effects can
inflation cause in an economy? Is inflation that bad? High rates of inflation
is bad because it can eat up the hard-earned money of ordinary people. Life
of a common man will become tough. His savings will soon be exhausted,
unless his investments offer a higher rate of return than the inflation rate
present in the country.
, Inflation Rates in India
There are different indices in India like Wholesale Price Index(WPI),
Consumer Price Index(CPI) etc which measure inflation rates in India. But
what we generally find in headlines as inflation rate in India is Inflation rate
based on WPI. In the last 50 years, WPI based inflation rate shows an
average inflation rate around 7-8%. The highest inflation rate observed in
India was 34.68 Percent in September of 1974. The lowest rate touched
was -11.31 Percent in May of 1976 ( a case of deflation).
How to measure Inflation rate?
Unchecked inflation can ruin the whole economy. There are many examples
from African and South American economies which got shattered by the
high inflation rates. But who measures the inflation rate in India? And what
are the types of Inflation indices in India? Let’s study each of them.
Inflation can be measured at three levels – producer, wholesaler and
retailer (consumer). Prices generally rise in each level till the commodity
finally reaches the hand of the consumer.
Inflation at Producer Level
As of now in India, there is no index to measure inflation at producer level.
A Producer Price Index (PPI) is proposed, but so far this type of inflation
calculation has not started in India.
Inflation at Wholesale Level
This is the most popular inflation rate calculation methodology in India. The
index used to calculate wholesale inflation is known as Wholesale Price
Index (WPI). This inflation rate is often known as headline inflation. WPI is
released by the Ministry of Commerce and Industry.
