A sustained rise in the prices of commodities that leads to a fall in the purchasing power of a

nation is called inflation. Although inflation is part of the normal economic phenomena of any
country, any increase in inflation above a predetermined level is a cause of concern.
High levels of inflation distort economic performance, making it mandatory to identify the causing
factors. Several internal and external factors, such as the printing of more money by the
government, a rise in production and labor costs, high lending levels, a drop in the exchange rate,
increased taxes or wars, can cause inflation.

Causes
Different schools of thought provide different views on what actually causes inflation. However,
there is a general agreement amongst economists that economic inflation may be caused by
either an increase in the money supply or a decrease in the quantity of goods being supplied.The
proponents of the Demand Pull theory attribute a rise in prices to an increase in demand in
excess of the supplies available. An increase in the quantity of money in circulation relative to the
ability of the economy to supply leads to increased demand, thereby fuelling prices. The case is
of too much money chasing too few goods. An increase in demand could also be a result of
declining interest rates, a cut in tax rates or increased consumer confidence.
The Cost Push theory, on the other hand, states that inflation occurs when the cost of producing
rises and the increase is passed on to consumers. The cost of production can rise because of
rising labor costs or when the producing firm is a monopoly or oligopoly and raises prices, cost of
imported raw material rises due to exchange rate changes, and external factors, such as natural
calamities or an increase in the economic power of a certain country.
An increase in indirect taxes can also lead to increased production costs. A classic example of
cost-push or supply-shock inflation is the oil crisis that occurred in the 1970s, after the OPEC
raised oil prices. The US saw double digit inflation levels during this period. Since oil is used in
every industry, a sharp rise in the price of oil leads to an increase in the prices of all commodities.
While money growth is considered to be a principal long-term determinant of inflation, nonmonetary sources, such as an increase in commodity prices, have played a key role in triggering
inflation in the past four decades.
Inflation has become a major concern worldwide in 2008, with global prices rises in oil, food, steel
and other commodities being the culprit.

State
Indias Wholesale Price Index Based Inflation Rate Edges Higher to 7.55 Percent in May 2012
New Delhi (Delhi, India), June 14, 2012
Inflation rate in India increased slightly to 7.55% in May 2012 from 7.23% in April 2012 based on
2004-05 as the base year. The rate of inflation was 9.56 percent in May 2011.
Office of the Economic Adviser (OEA) of the Ministry of Commerce and Industry, Government of
India, released the latest monthly and annual inflation rate data on Thursday, June 14, 2012.
Headline inflation, which is based on the wholesale prices, has remained above 6 percent mark in
India since January 2010.
Wholesale Price Index (WPI) Break-up for May 2012
Primary Articles (Weight in WPI 20.11%): 10.88% vs 9.71% Month on Month (MoM)
Food Articles (Weight in WPI 14.34%): 10.74% vs 10.49% Month on Month
Non-Food Articles (Weight in WPI 4.26%): 8.47% vs 1.61% Month on Month
Fuel and Power (Weight in WPI 14.91%): 11.53% vs 11.03% Month on Month
Manufacturing Products (Weight in WPI 64.97%): 5.02% vs 5.12% Month on Month
The inflation rate in India is based on the Wholesale Price Index (WPI). In India, the Wholesale
Price Index is more closely observed than the Consumer Price Index (CPI), as it includes a higher
number of products. Manufactured products have a weight of about 65 percent in the WPI basket.

The ambiguity in global oil markets has worsened inflation edginess in India, which imports threequarters of its oil. India is Asias third largest economy with a $1.3 trillion economy.
Wholesale Price Index Based Inflation Rate in India on Year-on-Year Basis
May 2012: 7.55% Yearly
April 2012: 7.23% Yearly
March 2012: 7.69% Yearly (Revised from 6.89%)
February 2012: 7.36% Yearly
January 2012: 6.89% Yearly
December 2011: 7.74% Yearly
November 2011: 9.46% Yearly
October 2011: 9.87% Yearly
September 2011: 10.00% Yearly
August 2011: 9.78% Yearly
July 2011: 9.36% Yearly
June 2011: 9.51% Yearly
May 2011: 9.56% Yearly
April 2011: 9.74% Yearly
March 2011: 9.68% Yearly
February 2011: 9.54% Yearly
January 2011: 9.35% Yearly
December 2010: 9.41% Yearly
November 2010: 8.08% Yearly
October 2010: 9.08% Yearly
September 2010: 8.98% Yearly
August 2010: 8.87% Yearly
The Ministry of Statistics and Programme Implementation has announced revision in the inflation
rate for the previous months, as the wholesale-price index has been adjusted from April 2004
after errors were discovered in the price data collected.
The food inflation, which accounts for 14.34 percent in the overall Wholesale Price Index (WPI)
inflation, has remained high since December 2010 scaling up to 18.32%.
Indian Government Monthly and Annual Consumer Price Index
Indias Consumer Price Index Based Inflation Rate Rises to 10.36 Percent in April 2012
Reserve Bank of India Monetary Policy and Quarterly Review
Reserve Bank of Indias Policy on Curbing Rising Prices in India

How it affects the economy

Effects of Inflation:
Inflation affects both the economy of a country and its social conditions, as well as the political
and moral lives of its inhabitants. However, the economic effects of Inflation are stated and
described below:
Price inflation has immense effect on the Time Value of Money (TVM). This acts as a principal
component of the rates of interest, which forms the basis of all TVM calculations. The real or
estimated changes occurring in the rates of inflation lead to changes in the rates of interest as
well.
Inflation exerts impact on the treasury of a nation as well. In United States of America, Treasury
Inflation-protected Securities (TIPS) ensures safety to the American government, assuring the
public that they will get back their money. However, the rates of interest charged by TIPS are less
compared to the standard Treasury notes.
The most immediate effect of inflation is the decrease in the purchasing power of dollar and its
depreciation. Inflation influences the investments of a country. The Inflation-protected Securities
(IPSs) may act as a guard against the loss in the purchasing power of the fixed-income
investments (like fixed allowances and bonds), which may occur during inflation.
Inflation changes the allocation of income. This exerts maximum effect on the lenders than the

borrowers at the time of persisting inflation, because the loans sanctioned previously are paid
back later in the form of inflated dollars.
Inflation leads to a handful of the consumers in making extensive speculation, to derive
advantage of the high price levels. Since some of the purchases are high-risk investments, they
result in diversion of the expenditures from regular channels, giving birth to a few structural
unemployments.