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Definition:
Inflation can be defined as a rise in the general price level of goods and services and therefore a fall in the value of money. That means the purchasing power of your money decreases.
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The 676 commodities are divided into different groups & sub groups. Each commodity has some weightage in the WPI index. Below are the weightages of commodities group wise:
ITEMS Weightage
Formula:
WPI at end of year WPI at beginning of year X 100 WPI of beginning of year 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) x100 =3.42% 106.09 So the inflation rate for the year 1981 is 3.42%.
WPI contains commodities which CPI contains set of goods are not even consumed by purchased and consumed by consumers. consumers. Example: Coarse grains that go into making of livestock feed. WPI is measured in terms of price increase for the producers and traders. CPI is measured in terms of price increase for the end consumer.
Finance ministry officials point out that there are many problems while shifting from WPI to CPI model. First of all, they say, in India, there are four different types of CPI indices and that makes switching over to the Index from WPI fairly risky and unwieldy. The four CPI series are: 1. CPI Industrial Workers 2. CPI Urban Non-Manual Employees 3. CPI Agricultural laborers' 4. CPI Rural labour
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Secondly, officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers.
The WPI is published on a weekly basis and the CPI, on a monthly basis. And in India, inflation is calculated on a weekly basis.
Types of Inflation
Demand - Pull Inflation
Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the macro economy - households, businesses, governments and foreign buyers.
Causes of Inflation
There are various factors which cause inflation in the economy -
Monetary Factors
Expansion of Money Supply Increase in Disposable Income
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Non-monetary Factors
Rising Population
Natural Calamities
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Structural Factors
Capital Shortage Infrastructural Bottlenecks Limited Efficient Entrepreneurs Lack of Foreign Capital Imperfections of the Market Unemployment
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Global Factors Increase in International Prices Cold War with other countries Rise in Fuel Prices
Effects Of Inflation
Positive Effect
Benefit the cartels formed by the companies Benefit borrowers Farmers Gain In Inflation Tobin effect
Negative Effect
Hoarding Increased risk - Higher uncertainties Distortion of relative prices
Fixed income recipients will be hurt Lowers national saving Rising prices of imports Income diffusion effect Illusions of making profits
1.Monetary Measures
2.Fiscal Measures 3.Other Measures
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1. Monetary measures
The monetary measures which are widely used to control inflation are divided into Bank rate policy Statutory Liquidity Ratio Open market operation Repo rate
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Reverse repo rate
5.75% 5%
3%
3.75%
5.25%
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Selective credit controls Moral suasion Credit authorization scheme
Fiscal Measures
Taxation
Government expenditure
Public borrowings
Protectionist measures
Other Measures
To Increase Production Price Control Rationing
Food Inflation
Food price inflation is one of the most critical economic problems in the country today. Lower agricultural growth in India compared to the much faster GDP growth.
The high food price inflation is having a significant impact on the Indian consumer. The chart below gives the way the Indians spend.
Some Prescriptions
The release of food grain stocks together with faster distribution. Part of Foreign Exchange Reserves can be used for bulk import of essential commodities. Improving food production and productivity. Promoting Private sector Participation in Food grain Management. Stepping up investments Foreign Direct Investment (FDI) in food retailing
Inflation Chart
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