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The document discusses inflation in India and how it is measured. It defines inflation as a general rise in price levels and explains how it is estimated using indices like the WPI and CPI. The two main causes of inflation are an increase in demand and reduced supply. Inflation can be creeping, walking, running, or hyper. High inflation negatively impacts the economy by redistributing income and wealth, decreasing production and consumption, and causing an unfavorable balance of payments. Methods to control inflation include credit control, increasing direct taxes, price controls, and trade measures.

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31 views4 pages

F52 H Xxjpbieuz OYJLGSS

The document discusses inflation in India and how it is measured. It defines inflation as a general rise in price levels and explains how it is estimated using indices like the WPI and CPI. The two main causes of inflation are an increase in demand and reduced supply. Inflation can be creeping, walking, running, or hyper. High inflation negatively impacts the economy by redistributing income and wealth, decreasing production and consumption, and causing an unfavorable balance of payments. Methods to control inflation include credit control, increasing direct taxes, price controls, and trade measures.

Uploaded by

imverypro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Inflation in India: WPI, CPI, Effects & Causes

What is Inflation?

• The general rise in the price level of goods and services.


• It is estimated as the percentage rate of change in price index over the reference
time period.
• Currently in India inflation rate is measured with the help of the Consumer Price
Index- combined (Base year- 2012).
• Till April 2014, the Inflation rate was measured with the help of WPI (Wholesale
Price Index).
• Rate of Inflation= (Current period price index-Reference period price
index)/(Reference Period Price Index)×100

Reason for Inflation:

The reason for price rise can be classified under two main heads: (1) Increase in
demand (2) Reduced supply.

How to Measure Inflation?

Inflation can be measured into three types:

1. Wholesaler Price Index

2. Consumer Price Index

3. Producer Price Index

Producer Price Index: A producer price index is an index of prices that measures the
average price changes received for their output by domestic producers.

Consumer Price Index: Consumer price index can be called demand-pull inflation,
which is inflation caused by rising consumer demand and supply for goods and services
that can't catch up with it.

Wholesaler Price Index: On the other hand, the whole selling price index can be called
supply push inflation, where rising economic activity creates more supply and more
demand for goods and services from such rising activity.

Causes of Inflation:

There may be two sets of factors that can cause an economy to become inflated. They
are the pull of demand and the push of costs.
Demand Pull Factors

1. Rise in population.
2. Black money.
3. The rise in income.
4. Excessive government expenditure.

Cost-Push Factors

1. Infrastructure bottlenecks which lead rise in production and distribution costs.


2. Rise in Minimum Support Price (MSP).
3. Rise in international prices.
4. Hoarding and black marketing.
5. The rise in indirect taxes.

Type of Inflation

1. Creeping Inflation

• Price rise at a very small rate (< 3 %)


• It is considered safe and essential for the economy.

2. Walking or Trotting Inflation

• Price rise at moderate rate (3 % < Inflation < 10 %)


• Inflation at this rate is a warning signal for the Economy.

3. Running Inflation

• Price rise at high rate (10 % < Inflation < 20 %)


• It affects the economy adversely.

4. Hyperinflation or Galloping Inflation or Runway Inflation

• Price rise at very high rate (20 % < Inflation < 100 %)
• This situation brings the total collapse of the Economy.

Other definitions

1. Deflation

• It is the opposite of Inflation.


• Reduction of the general level of price in an economy.
• In this price index measured is negative.
2. Stagflation: When stagnation and inflation coexist in the economy.
3. Stagnation: Low national income growth and high unemployment.

4. Disinflation

• When the rate of Inflation is at a slower rate.


• Example:
If the Inflation of last month was 4 % and the rate of inflation in the current month
is 3 %.

5. Reflation:

• The deliberate action of the government to increase the rate of inflation to


redeem the economy from a deflationary situation.

6. Core Inflation:

• It is a measure of price rise in the economy excluding the price rise of some
products (whose price is volatile and temporary in nature.

Effects of Inflation

1. Redistribution of income and wealth

• Due to the effect of inflation, some group of people loses and another group of
people gains.
• Example-
In the case of debtors and creditors
Debtor- gainer
Creditor- loser
In the case of Producers and Consumers
Producer- gainer
Consumer- loser

2. Effects on Production and Consumption

• Due to inflation, the demand decreases which curtails the production.


• People try to use fewer services which lead to a decrease in consumption.

3. Unfavourable Balance of Payments

• Export decreases and import increases from other countries which lead to a
decrease in the forex reserve.

Measures to control Inflation


1. Credit control

• It is used by RBI.

2. Increase in Direct Taxes

• Due to the increase in direct taxes, people have less money available to them
and low demand from them leads to a lower price.

3. Price Control

• By fixing the maximum price limit by authorities.

4. Trade measures

• Maintain proper supply in the economy by export and import of goods and
services.

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