Indian Economy - Inflation (Notes)

Inflation is the continuous rise in the prices of commodities over a period of time.

Ø  Reasons for Inflation:
·        Increase in Government expenditure
·        Low food production
·        Black Money
·        Poor Infrastructure
·        Increase in oil prices
·        Hoarding of essential commodities
·        Taxation policies
·        Rumors

Ø  Types of Inflation.
·        Demand Pull Inflation: Too much money chasing limited goods. In simple terms demand is increasing than the supply.
Hence what happens?
The prices will increase.
·        Cost Push Inflation: When the cost goes up the companies increase prices to maintain their profit margins.

Ø  What happens with this? (Consequences)
1.      The prices of commodities increase
2.      The Purchasing power decreases
3.      Cuts down the consumption levels
4.      Reduces the standard of living
5.      Leads to hoarding
6.      Increase wages

Ø  How the Inflation is measured?
·        By the changes in Whole Sale Price Index (WPI)?
·        By the changes in Consumer Price Index (CPI)?

Market Basket: The numbers of goods that are representatives of the economy are grouped together into what is called Market Basket.
Price Index: The cost of this Basket is compared over years and this result in Price index.
The change in percentage over year/years gives the inflation.
Ø  Whole Sale Price Index:
·        First published in India in the year 1902.
·        The first base year was 1952-53.
·        Revised roughly every decade.
·        Revised on the recommendations given by a committee appointed by the government.
·        So far 5 times revised.
·        The Present base year is 2004-05.
·        The revision was recommended by a working group committee  under the chairmanship of Prof/Abhijit Sen. (member Planning Commission)
·        This consists of over 240 commodities
·        Currently it consists of 676 items in the market basket.
·        The WPI figures are released every Thursday
·        The Price movement is calculated individually
·        This is released by office of the Economic advisor under the Ministry of Commerce and industry.

·        Introduced in the year 1970.
·        There are four series in this
1.      CPI (UNME) Urban Non-manual employees
(This is published by Central Statistical Organization, which is a part of the Ministry of Statistics and program Implementation).
2.      CPI (AL) Agricultural Labourer
3.      CPI (RL) Rural Labour
4.      CPI (IW) Industrial Worker
CPI (AL, RL, IW) are published by the department of Labour. 

ü  It has its worst impact on consumers.
ü  High prices of day-to-day goods make it difficult for consumers to afford even the basic commodities in life.
ü  This leaves them with no choice but to ask for higher incomes.
ü  Hence the government tries to keep inflation under control.
ü  Contrary to its negative effects, a moderate level of inflation characterizes a good economy.
ü  An inflation rate of 2 or 3% is beneficial for an economy as it encourages people to buy more and borrow more, because during times of lower inflation, the level of interest rate also remains low.
ü  Hence the government as well as the central bank always strives to achieve a limited level of inflation.

ü  This is opposite to inflation
ü  This happens when the inflation falls below the level of zero percent.
ü  The value of the currency increases.
ü  The reason may be reduction of money supply or reduction in spending
ü  The other reason may be large scale unemployment

ü  This is a situation where the rate of economy growth is very slow and other side the prices are increasing.
ü  The effects are increased unemployment and also inflation
ü  This generally happens internationally when the oil prices shoot up very sharply. This happened during 1970s

ü  This is a situation of sharp increase in the prices
ü  It happens when there is too much money flow into the market
ü  There is huge imbalance in money supply and demand