upscdictionary:: Economy- What is Inflation, Causes, Effects, Measures

What is Inflation?

Inflation is the Important concept in National accounting process. Here is a Article to get insights into topic on Inflation

Index of the Topics

1. Definition of Inflation?
2. What Causes/Types of Inflation
   1. Cost Pull Inflation
3. Effects of Inflation
4. How the inflation is measured
   1. WPI
   2. CPI
5. CPI (New Series Started 2012)
6. Difference between WPI and CPI
7. What is Deflation?
8. What is Hyperinflation?
9. What is Stagflation?

Inflation

Definition of Inflation?

Inflation is short can be described as the Increase in the general level of prices for goods and services over a period of time, means the value to purchase the good and services raises, we get only fewer goods and services for each unit of the currency and this can impact the whole economic system of the particular country

What Causes/types of Inflation?

Of course there are many factors that contributes to inflation like false Rumors about the prices, the money supply in the system, national debt, exchange rates, political disturbances, and many more, but the main causes of inflation are two that are widely accepted

1. Demand Pull Inflation and
2. Cost Pull Inflation

Demand Pull Inflation

When demand increasing more than supply of goods and services, results to Demand pull inflation higher demand less supply

Cost Pull Inflation

Cost of goods and Services increases if the cost of investment on manufacturing good and services increases. This results in the increase of prices and services which is the result of cost pull inflation

Effects of Inflation

• Inflation does not have its effect on all the people equally. For example for a rich man it won’t make any difference to buy tomatoes at cost Rs.50/-per KG, but for middle and Poor it is a huge burden.
• It transfer the purchasing power of the good and services from weaker section of society to rich, so this can promote inequality in the society
• Inflation causes Inflation due to increase in price the marketers will store the stock so as sell at high prices this causes further inflation as the demand is going high but not the supply
• Poor’s are the mostly affected categories, increasing Burdon on them to buy goods and services
• Inflation creates uncertainty regarding future prices, this can adversely affect investor’s sentiment this intern can result in lower investment and therefore lower growth in the economy

How the inflation is measured

In India inflation is measured by certain indices popularly known as

1. WPI (Whole sale price Index) and
2. CPI (Consumer Price Index)
   1. CPI (IW)
   2. CPI (AL)
   3. CPI (RL)
   4. CPI (UNME)

After 2012 New Series of CPI

1. CPI (Urban)
2. CPI (Rural)
3. CPI (Urban + Rural)

GDP Deflator released on every quarterly basis by government of India

WPI

WPI, (Previous Base year to assess WPI or Base year for WPI was 1993 -1994 and present series has taken 2004-05 as base year on the recommendations working group (committee set to revise WPI series)

The basket of Latest WPI consists of 676 Items

CPI

CPI (to assess the inflation on different sections of labor forces)

In India, till the year January 2012 only 4 CPI exists

1. CPI for Industrial Workers CPI (IW) (Base year 2001)
2. CPI for Agriculture Laborers CP I(AL) (Base year 1986-1987)
3. CPI for Rural Laborers CPI (RL) (Base year 1986- 1987)
4. CPI for Non- Manual Employees CPI (UNME) (Base year 1984- 1985)

CPI (IW), CPI (AL), CPI (RL) – Complied by Labor Bureau (Ministry of labor and Employment)

CPI (UNME) – Complied by Statistical Labor Organization (CSO) (ministry of Statistics and Program me Implementation)

CPI (New Series Started 2012)

This is published by Ministry of Statistics and Program me Implementation this provides new CPI for all over the country all Indian Rural and all India urban

1. CPI for All Urban population of India CPI (Urban)
2. CPI for All Rural population of India CPI (Rural)
3. CPI for Both Urban and Rural based on above CPI (Urban), CPI (Rural)

The underlying Basket for three indices are different, the consumption basket has been selective on basis of consumption basket reveal in NSS (national Sample Survey) 2004-2005

In Rural Basket weight age of Housing is Zero, while in Urban Basket this is approximately 20%

The CPI for Both Urban and Rural is a weighted average of rural and urban baskets this is expected to provide comprehensive and more reliable information on prices faced by public

Difference between WPI and CPI

1. WPI doesn’t incorporate services that account for approximately 60% of GDP where as CPI does
2. If Inflation is mainly due to poor inflation WPI Inflation Lower inflation than CPI
3. In WPI share of intermediate goods is quite high while CPI dominates by Final goods and series
4. CPI is based on Retail Prices

Deflation

Opposite to the Inflation and can be defined as the decrease in the general level of price and services over a period of time and has its impact on the economy of the country

Hyperinflation

Hyperinflation is defined as Sudden/Unusual rapid inflation, which show its considerable impact on the nation’s monetary system and some time even it collapses.

This happens when there is a large increase in money supply but not appreciated GDP growth results in imbalance between demand and supply for the money and results to hyperinflation

Stagflation

Slow down of Economic (Economic aspects of the country which contributes to national income) and increase in the prices levels causes stagflation which results in unemployment, rise in prices

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