What is inflation?


What is inflation?

Inflation refers to an increase in the price level or a decrease in the value of money over a certain comparable period of time & for a particular commodity or service or a basket of commodity or services.

What are the causes of inflation?

Inflation is an outcome of an increase in demand over increase in supply during a particular period.

Inflation Indices & Measurement


How is inflation measured in india?

Inflation is measured via various indices, each corresponding to a group, either connected by activity or residence.

Types of Price Indexes - Depending upon the selected set of goods and services used, multiple types of baskets of goods are calculated and tracked as price indexes. The most commonly used price indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI) is releasing All India Consumer Price Index (CPI) on Base 2012=100

The Consumer Price Index (CPI)

The CPI is a measure that examines the weighted average of prices of a basket of goods and services that are of primary consumer needs. They include transportation, food, and medical care. The CPI analyzes the retail inflation of goods and services in the economy across 260 commodities, including food, fuel, clothing, etc. The CPI-based retail inflation considers the change in prices at which the consumers buy goods.

Components of CPI

The following are the primary components of CPI (C): (along with their weights)

  • Food and Beverage – 45.86;
  • Food and Beverage – 45.86;
  • Housing – 10.07;
  • Fuel and Light – 6.84;
  • Clothing and Footwear – 6.53;
  • Pan, tobacco, and intoxicants – 2.38;
  • Miscellaneous – 28.32;

Core” inflation -  Some economists prefer to examine inflation without considering food and energy prices, which can fluctuate a lot from month to month. “Core” inflation looks at price changes but excludes food and energy prices. The CPI also typically reports a higher inflation rate than the other main indicator, the Personal Consumption Expenditures Price Index.

The Wholesale Price Index (WPI)

The WPI is another popular measure of inflation. It measures and tracks the changes in the price of goods in the stages before the retail level. The Wholesale Price Index (WPI), analyzes the inflation of only goods across 697 commodities


Inflation Types


Demand-Pull Effect - Demand-pull inflation occurs when an increase in the supply of money and credit stimulates the overall demand for goods and services to increase more rapidly than the economy's production capacity. This increases demand and leads to price rises.

Cost-Push Effect - Cost-push inflation is a result of the increase in prices working through the production process inputs. When additions to the supply of money and credit are channeled into a commodity or other asset markets, costs for all kinds of intermediate goods rise. This is especially evident when there's a negative economic shock to the supply of key commodities.

Wage Inflation - In other cases, a rise in wages might cause prices to rise across an economy. In this case, companies have to pay their workers more, and they often pass on the increases to the consumer, which causes inflation in the price of goods and services.

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