What is Inflation? Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Inflation measures the average price change in a basket of commodities and services over time. The opposite and rare fall in the price index of this basket of items is called ‘deflation’. Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This is measured in percentage.
What are the effects of Inflation?
The purchasing power of a currency unit decreases as the commodities and services get dearer. This also impacts the cost of living in a country. When inflation is high, the cost of living gets higher as well, which ultimately leads to a deceleration in economic growth. A certain level of inflation is required in the economy to ensure that expenditure is promoted and hoarding money through savings is demotivated.
As money generally loses its value over time, it is important for people to invest the money. Investing ensures the economic growth of a country.
Who measures Inflation in India?
Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of the economy. In India, the Ministry of Statistics and Programme Implementation measures inflation.
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How is Inflation measured?
In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index), which measure wholesale and retail-level price changes, respectively. The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.
On the other hand, the goods or services sold by businesses to smaller businesses for selling further is captured by the WPI. In India, both WPI (Wholesale Price Index) and CPI (Consumer Price Index) are used to measure inflation.
What are the main causes of Inflation?
The main causes of inflation in India have been subject to considerable debates and discussions. These are some of the chief reasons for the increase in prices:
- High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.
- Excess circulation of money leads to inflation as money loses its purchasing power.
- With people having more money, they also tend to spend more, which causes increased demand.
Also, note the following pointers:
- Spurt in production prices of certain commodities also causes inflation as the price of the final product increases. This is called cost-push inflation.
- Increase in the prices of goods and services is also a factor to consider as the involved labour also expects and demands more costs/wages to maintain their cost of living. This spirals to further increase in the prices of goods.
Is Inflation bad for everyone?
Inflation is perceived differently by everyone depending upon the kind of assets they possess. For someone with investments in real estate or stocked commodity, inflation means that the prices of their assets is set for a hike. For those who possess cash, they may be adversely affected by inflation as the value of their cash erodes.