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What is Inflation?

3 Mins read

It is one of the most common refrains heard across the country. It is the rise in the prices of goods and services these can be of daily or everyday. Use items such as food, clothing, housing, recreation, transport, consumer staples, or even industrial goods. Inflation means the average price rise over time and the opposite and rare fall in price is called deflation.

It indicates a fall in purchasing power that is for Example:- A 100 rupee note buys a lesser amount of the same commodity over a period of time. Inflation is measured in percentage.

What are the Effects of Inflation?

The purchasing power of the currency falls as goods and services get costlier. When it is high the cost of living gets higher as well beyond a reasonable level inflation hurts economic growth a certain level of inflation. It is required in the economy to promote expenditure, encourage. The production of goods and services, and to demotivate hording money in savings. As money generally loses its value over time people need to invest the money. Investing ensures the economic growth of a country.

Who measures & Controls Inflation in India?

In India the Ministry of Statistics and Programme Implementation measures inflation country’s. The central bank the Reserve bank of India works to limit inflation within a band through its monetary policy. By using tools such as the REPO RATE.

The government also influences inflation through its taxation and fiscal policy higher MSPs on agriculture products taxes on petrol and diesel or even clothes can lead to rising in inflation a cut leads to a fall in it.

How is Inflation Measured?

  • Wholesale Price Index (WPI)
  • Consumer Price Index (CPI)

Wholesale Price Index (WPI)

The wholesale price index is calculated by measuring the inflation of a basket of goods certain number of goods chosen as a sample from different sectors. For Example: the wholesale price index chooses items from three broad categories Primary articles, fuel and power, and manufactured products.

  1. Primary Articles contain food articles, non-food articles, minerals, crude petroleum, and natural gas.
  2. Fuel and Power Contain Coal, mineral oil such as furnish oil, LPG, Petrol, etc.
  3. Manufactured products Contain varied groups such as beverages, textile, medicines, leather products, chemicals, motor vehicles, meats, etc.

But all three categories do not have equal weightage based on their importance different weight has assigned to these three categories. Manufacture product has a weightage of 64.23%. Primary article which contains food and non-food items has a weightage of22.62%. And Fuel and power category has a weightage of 13.15%.

Wholesale price index data is released by the Office of Economic Advisor of the Ministry of Commerce and Industry.

Consumer Price Index (CPI)

The Consumer Price index is an indicator used to measure that is the change in the general price level in India. And many other countries it is calculated by the central statistical office under the ministry of statistics and program implementation the bases of a basket of goods and services used by consumers in their daily life. It measures a change in the price level over time by comparing the amount that the consumers pay for this basket.

In doing so it considers the weighted average of the price change of the items in the basket based on their importance. CPI is calculated as follows:

FOR EXAMPLE: The price of a basket of goods containing milk, butter medical care, and shirts is rupees 100 in 2014. But in the base year if the same basket cost you rupees 130 in 2022 then the is said to be 30%. In India four types of CPI is calculated.

  • For Industrial workers
  • For Agricultural Labourer
  • For Rural Labourers
  • Combined (Rural/Urban)

What are the main causes of Inflation?

Some of the main reason behind inflation or rise in price are High Demand and low supply. This create a demand supply gap which leads to hike in price. Excess circulation of money this leads to inflation as money loses. And its purchasing power with people have more money they also tend to spend more which causes increase in demand. For example: If more people want to buy tomatoes than the tomato price will rise.

Spurt in cost of production causes inflation. For example: Soap and shampoo prices may rise of the chemical used in making these get costlier. This is called Cost push Inflation.

Is Inflation Bad For Everyone?

It need not always br bad economists believe some inflation is necessary for economics growth however beyond the limit hurts both consumers and economic growth.

Inflation also has an impact on the assest you hold for someone with investments in real estate or stock commodity inflation means that the prices of their assets are set for a hike those who posses cash may be adversely affected by inflation as the value of that cash erodes so governments and central banks work towards controlling in ideal range.

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