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The term "inflation" originally referred to increases in the amount of money in circulation In economics, inflation is an increase in the total

l money stock resulting in a rise in the general level of prices of goods and services in an economy over a period of time

Other economic concepts related to inflation include Deflation Disinflation Hyperinflation Stagflation Reflation

How inflation rate is calculated?

Inflation Rates

Demand-pull

Inflation Cost-push Inflation Pricing Power Inflation Sectoral Inflation Fiscal Inflation

The Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods. Some countries (like India and The Philippines) use WPI changes as a central measure of inflation. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. This helps in analyzing both macroeconomic and microeconomic conditions.

WPI uses a sample set of 435 commodities for inflation calculation The price from wholesale market is taken for the calculation WPI is available for every week It has a time lag of two weeks, which means WPI of the week two weeks back will be available now

Primary Articles Food Articles sugar cane Minerals Fuel, Power, Light & Lubricants Manufactured Products Food Products of which sugar Beverages, Tobacco & Tobacco Products Textiles Wood & Wood Products

Paper

& Paper Product Leather & Leather Products Rubber & Plastic Products Chemicals & Chemical Products Non-Metallic Mineral Products Basic Metals. Alloys & Metals Products Machinery & Machine Tools Transport Equipments

A Consumer price index measures changes in price levels of consumer goods and services purchased by households In India, Central Statistical Organization is responsible for CPI publication Two basic types of data are needed to construct the CPI Price data Weighting data

The index is usually computed monthly, or quarterly in some countries, as a weighted average of subindices for different components of consumer expenditure, such as food, housing, clothing, each of which is in turn a weighted average of sub-subindices

FOOD AND

BEVERAGES (breakfast cereal, milk, coffee, full service meals, snacks) HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)

MEDICAL

CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services) EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software nd accessories); OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

WPI
Wholesale price index measures inflation at each stage of production Wholesale price index is the basis for the economic deflation rate

CPI
Consumer price index measures inflation only at final stage of production. Consumer price index is the basis for the inflation rate.

The WPI is compiled and published by Office of the Economic Advisor on a weekly basis
Wholesale Price Index (WPI), is based on the price prevailing in the wholesale markets or the price at which bulk transactions are made WPI is said to result an erroneous measure

CPI is compiled and published by the Labour Bureau on a monthly basis in India.
The Consumer Price Index (CPI), is based on the final prices of goods at the retail level.

CPI will describe actual cost of living and inflation rate more accurately.

There are only few countries that uses WPI Many nations have already shifted to using to calculate inflation rates CPI.

Monetary measures
The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation

Monetary measures include:


Bank rate policy Cash reserve ratio and Open market operations

Fiscal

measures

Fiscal measures to control inflation include taxation, government expenditure and public borrowings. The government can also take some protectionist measures (such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.).

Measures taken to contain prices of essential commodities include -- import prices reduced to zero on rice, wheat pulses, edible oils (crude) and onions. Ban on export of edible oils and pulses, suspension of futures trading in rice, urad and tur dal and extension of stock limit orders in case of pulses and rice. As part of the monetary policy review stance, the RBI has taken suitable steps with 11 consecutive increases in policy rates and related measures to moderate demand to levels consistent with the capacity of the economy to maintain its growth without provoking price rise.

Demand
-

Increase in nominal money supply Increase in disposable income Expansion of Credit Deficit Financing Policy Black money spending Global factors Increasing Public Expenditures

Supply
-

Shortage of factors of production or inputs Industrial Disputes Natural Calamities Artificial Scarcities

Sectors affected by inflation Impact on household sector Impact on business sector Impact on debtors and creditors Impact on Govt.

Inflation directly reduces the purchasing power of the household sector-first, nonessential/ luxury exp. cut-real income fallsexpenses on some essentials also cut-lower standard of living-cash saving discouraged, stocking physical goods (gold)-fixed income groups suffer the most-Sectors where income is related to prices (businessman) not affected in the short run.

Fall different for different commodities depending on the price elasticity of demand. Production costs go up, especially if wages are linked to inflation index-Costs increase, squeezes profits. Remedy: cost cutting and efficiency building, new investment risky, realigned to shift in consumer patterns-govt. policies importantcompetitive environment changes-composition of industrial outputs change.

Redistribution of income from creditors to debtors-repaid debt in depreciated value as purchasing power has eroded to the extent of inflation.

Redistribution of income from creditors to debtors-repaid debt in depreciated value as purchasing power has eroded to the extent of inflation.

Increase in inflation would inhibit growth and raise prices for almost every industry. Emerging economies like China and India are experiencing particularly strong growth add on pressure to developed economies. Industries Oil Metal Tourism Agriculture and food Transportation

During the recession, the Oil Drilling and Gasoline Extraction industry experienced major fluctuations. currently increasing prices are supporting industry growth, since demand for gas is on the rise. From 2010 to 2011, this industry expects revenue to be increased by 7.9% to $329.9 billion. Further escalations may cause them to seek out alternatives to gasoline.

Metal industries have also experienced highs and lows as overseas economies emerge and inflation threatens operators performance. Metal in the United States suffered during the recession because many metals are tied to construction. In particular, the price of aluminum. In 2009, the price of aluminum dropped a massive 35.3% to $1,669 per metric ton. The price expected to rise by 8.2% to $2,315 per metric ton in 2011.

Gold has increasingly thrived as an investment metal, especially because of inflationary concerns. Low interest rates particularly drove demand for gold over the recessionary period.

An unexpected market to benefit from inflation, the Tourism industry will face mostly positive conditions coming out of the recession. From 2010 to 2011, industry revenue is expected to increase at a rate of 4.1% to total $1.4 billion.

It is also a unexpected market where some economy would benefit while other would suffer. Eg: Russia, Japan etc. Industry operators are unable to avoid the prospect of higher prices due to this pressure; moreover, some companies are already increasing their prices. Oilseed Farming industrys revenue is expected to increase at an average annual rate of 9.4% from $552.9 million to $866.8 million, reflecting strong growth in demand.

The transportation industries will continue to indicate major changes in the global economies. In light of rising costs, consumers are looking for budget-friendly options. Eg: Ford- ecoboost engines. The Car and Automobile Manufacturing industrys revenue will increase at a rate of 17.5% to $89.0 billion. With the unemployment rate remaining relatively high, this factor will stimulate demand for automobiles.

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