Inflation Measurement in India


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

Inflation is as an increase in the price of bunch of Goods and services that projects the Indian economy. An increase in inflation figures occurs when there is an increase in the average level of prices in Goods and services. 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.
Inflation is caused by an increase in the money supply in the economy and can be controlled by lowering the money supply in the economy as people would have lesser money to spend, leading to reduced demand.

Reserve Bank of India manages the monetary measures through reserve requirements and lending rates comprising of Bank rate, Repo rate, Reverse repo rate, Cash reserve rate – by imposing restrictions and requirements on lending institutions to reduce the amount of credit available in the market, thereby reducing the amount of free flowing capital in the economy, i.e., the amount of excess liquidity in the financial market.

 This action increases the cost associated with borrowing currency, thereby reducing the demand of goods and services, which in turn reduces or stabilizes the prices of these goods and services.
India uses the Wholesale Price Index (WPI) to calculate and then decide the rate of inflation in the economy. Most developed countries use the Consumer Price Index (CPI) to calculate inflation. WPI was first published in 1902, and was one of the major economic indicators available to policy makers until it was replaced by the Consumer Price Index in most developed countries by in the 1970s. Some economists argue that it is high time that India abandoned WPI and adopted CPI to calculate inflation. WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level.

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, price data for 675 commodities is tracked through WPI which is an indicator of movement in prices of commodities in all trades and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag -- two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.  CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

 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.

Effects of Deflation

 During deflation the price of goods and services continue to fall and during that consumers will tend to delay their purchases hoping that prices may fall further. This is dangerous as this will lead to lower production, lower wages, and decline in demand and thus, consequently lead to further decrease in prices. This is known as deflationary spiral.


Thursday, 03rd Mar 2016, 01:09:51 PM

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