Inflation in India

INFLATION
Inflation is nothing more than a sharp upward rise in price level. Too much money chasing, too few goods. Inflation is a state in which the value of money is falling i.e. price are rising.

KINDS OF INFLATION
On the basis of rate of inflation On the basis of degree of control On the basis of causes Others

CAUSES OF INFLATION

Demand pull inflation - when price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices increase. Cost push inflation - A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

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HOW TO CONTROL INFLATION

Monetary Measures Fiscal Measures Other Measures

Monetary Measures
Credit Control Demonetization of Currency Issue of New Currency

Fiscal Measures
Reduction in Unnecessary Expenditure Increase in Taxes Increase in Savings Surplus Budgets Public Debt

OTHER MEASURES
To Increase Production Rational Wage Policy Price Control

How is it Measured?

Consumer Price Index - A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.

Wholesale Price Index - An index that measures and tracks the changes in price of goods in the stages before the retail level.

Problems with WPI

In present day service sector plays a key role in Indian economy. Consumers are spending loads of money on services like education and health. And these services are not incorpated in calculation of WPI. WPI measures general level of price changes either at level of wholesaler or at the producer and does not take into account the retail margins. Therefore we see here that WPI does give the true picture of inflation.

Problems with WPI

WPI is supposed to measure impact of prices on business. But we use it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the index.

Inflation rate
PI for a certain year - PI for a comparative year X 100 PI for a comparative year

EFFECTS OF INFLATION
They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Uncertainty about the future purchasing power of money discourages investment and saving.

EFFECTS OF INFLATION
There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation. Higher income tax rates. Inflation rate in the economy is higher than rates in other countries; this will increase imports and reduce exports, leading to a deficit in the balance of trade.

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