Inflation is the sustained upward movement in the overall price level of goods and services in the economy. When a unit of currency depreciates in value, so does purchasing power, as it takes more currency units to buy the same amount of goods and services than it did in the past. Inflation has a huge influence on our financial lives.
Let us take an example of a fruit for example An Apple. The price was Rs.85/- in the year 2013 and as on 2021 the price is Rs.250/- it has increased by 14.43% compounding yearly. Similarly, milk price was Rs.13/- in the year 2003 and as on 2021 the price is Rs.76/-. So, the price increased by 10.31% compounding yearly.
If inflation is too low it indicates dropping consumer demand, usually the sign of a wider economic problem. It also increases the burden of debt as inflation goes some way to offsetting interest rates. However, if inflation is too high it moves faster than growth in incomes and the purchasing power.
The five main reasons of inflation are,
- Growing economy
- New laws and tariffs imposed by the government
- To manage the national debt
- An excess money supply that can also drive demand-pull inflation
- Changes in the exchange rate
Inflation is measured is two ways, through Consumer Price Index (CPI) and Wholesale Price Index (WPI). India’s inflation rate is measured using the ‘Consumer Price Index’, where the change in prices of consumer goods, such as milk, footwear, clothing, wheat, rice, hospitalization, education and thousands of other such products and services are measured.
Consumer Price Index (CPI) | Wholesale Price Index (WPI) |
CPI measures the change in the price in the sale of goods or services in retail or directly to a consumer. | WPI is used to measure the average change in price in the sale of goods in bulk quantity by the whole seller. |
CPI is for goods as well as services | WPI is only for goods |
Inflation measure in the final stage in CPI | Inflation measure in the first stage in WPI |
CPI the price is paid by the consumer | The price paid by manufacturer and whole seller in WPI |
CPI focuses on the prices of goods purchased by consumers. | WPI focuses on the prices of goods traded between business houses |
In CPI education, food, transport, apparel, communication, recreation, housing and medical care are covered. | Item covered in WPI is fuel, power and manufacturing products.
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2 comments
Nimish Rambhia
September 17, 2021 at 3:26 pm
Interesting Analysis. Can do in-depth survey of the Impact of Price Rise vis-a-vis growth.
So according to you is Inflation Good or Bad?
User_Midas
September 20, 2021 at 4:04 pm
Thank you
So according to me if you owe money then inflation is very good for you because Inflation helps to boost the demand and consumption which helps in driving the economy growth and India being a developing country, Inflation has to be good.