What is inflation???
Inflation is a word which is used frequently in our economy.Inflation rate is the rate at which prices of goods
and services increase in its economy. It is an indication of the rise in
the general level of prices over a period of time. Since it's practically
impossible to find out the average change in prices of all the goods and
services traded in an economy.But a sample set or a basket of goods and services is used
to get an indicative figure of the change in prices, which we call the
inflation rate.
Inflation happens when there are less goods and more buyers, this will result in increase in the price of goods, since there is more demand and less supply of the goods.For example last year, one commodity price was Rs 100, same commodity this year is Rs105, here inflation is 5%. The 100 rupee money value in past, present & future has to be same as Rs 100 only. But commodity price increased, this is called inflation. Inflation shows the purchasing power an individual.
What are the methods of calculating Inflation???
There are mostly two methods are used to find out inflation
- Consumer price index (CPI)
- Wholesale price index (WPI)
The Consumer price index is a more advanced instrument for the measurement of inflation. The Consumer price index is not viable to be used in India because there is too much of a lag in reporting the Consumer price index numbers.Also CPI is calculated on monthly basis, but WPI calculated on weekly basis.Hence India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.
WPI was first published in 1902, and was one of the
more economic indicators available to policy makers until it was
replaced by most developed countries by the Consumer Price Index in the
1970s. WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. The Indian government has taken WPI as an indicator of the rate of inflation in the economy. 435 commodities are used to find out the Wholesale price index (WPI).
How to calculate WPI???
In this method, a set of 435 commodities and their
price changes are used for the calculation. The selected commodities are
supposed to represent various strata of the economy and are supposed to
give a comprehensive WPI value for the economy.
WPI is
calculated on a base year and WPI for the base year is assumed to be
100. To show the calculation, let us assume the base year to be 1970.
The data of wholesale prices of all the 435 commodities in the base year
and the time for which WPI is to be calculated is gathered.
Let's
calculate WPI for the year 1980 for a particular commodity, say wheat.
Assume that the price of a kilogram of wheat in 1970 = Rs 5.75 and in
1980 = Rs 6.10
The WPI of wheat for the year 1980 is,
(Wheat price in 1980 - Wheat price in 1970) (6.10-5.75)
------------------------------------------------X100= ------------- =6.09
Wheat price in 1970 5.75
Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 = 106.09.
In
this way individual WPI values for the remaining 434 commodities are
calculated and then the weighted average of individual WPI figures are
found out to arrive at the overall Wholesale Price Index. Commodities
are given weight-age depending upon its influence in the economy.
How is inflation rate calculated???
If we have the WPI values of two time zones, say, beginning and end of year, the inflation rate for the year will be,
(WPI of end of year - WPI of beginning of year)
--------------------------------------------------------- X 100
WPI of beginning of year
For example, WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st 1981 is 109.72 then inflation rate for the year 1981 is,
(109.72 -106.09)
-------------------- X 100 = 3.42%
106.09
and we say the inflation rate for the year 1981 is 3.42%.
Since
WPI figures are available every week, inflation for a particular week
(which usually means inflation for a period of one year ended on the
given week) is calculated based on the above method using WPI of the
given week and WPI of the week one year before. This is how we get
weekly inflation rates in India.
When inflation numbers published???
Every month 2nd friday inflation numbers will be published.
Relation Between inflation & Bank Interest rates???
Now a days, you might have heard lot of these terms and usage on inflation and the bank interest rates.Bank interest rate depends on many other factors, out of that the major
one is inflation. Whenever you see an increase on inflation, there will
be an increase of interest rate also. RBI's one of major duty is to controlling the inflation in a specific range by changing his monetary policy.
What is deflation???
Deflation is the continuous decrease in prices of goods and services.
Deflation occurs when the inflation rate becomes negative (below zero)
and stays there for a longer period.
Inflation history???
Historically, from 1969 until 2012, India inflation rate averaged 8%, reaching all time high of 34.7% in septemper of 1974 and a record low of -11.3% in May of 1976.
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