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Inflation, WPI and factors of Economic Development – 2018

Inflation, Price Rise, Economic Fluctuation

Inflation, Price Rise, Economic Fluctuation

Inflation is an economy-wide increase in general level of prices. Inflation affects all segments of the economy. It hurts persons having fixed incomes. Inflation affects retired people who depend on the interest income on their savings. Inflation upsets macro-economic decision making as the uncertainty regarding future costs can affect projections. It may appear that the borrowers are benefiting, but it leads to a fall in the cost of capital. Inflation is calculated on the basis of the movement of  WPI (Wholesale Price Index). WPI is used to monitor the dynamic movement of prices. WPI is used widely by Government, Industries, Banks and Business circles. So WPI acts as a medium to determine the formulation of trade, fiscal and other economic policies by GOI. The WPI indices are used as an escalation clause in the supply of raw materials, machinery and construction work. The Economic Advisor in the Department of Industrial Policy and Promotion is responsible for compiling WPI and releasing it.

Inflation, Price Rise, Economic Fluctuation

Types of Inflation

  1. Demand Pull Inflation: It occurs when excessive demand for commodities pulls up their prices. Too much money too few goods.
  2. Cost-Push Inflation: When wages and other costs rise up, the producers pass higher costs to the consumers in the shape of higher prices.
  3. Stagflation: A situation where high rates of inflation co-exist with high rates of unemployment.
  4. Hyperinflation: A situation of runaway inflation reaching even up to 100  percent per Annum. It is a case where money loses its importance as a medium of exchange.

Price level Measurement

Change in the price level is measured by the following:

  1. Wholesale Price Index
  2. Consumer Price Index
  3. Gross Domestic Product (GDP) Deflator

Wholesale Price Index:

The new series of WPI with 2012-13 as the base has a weighted average of indices covering 702 commodities, which are traded in primary, manufacturing, and fuel power sector. WPI is thus a measure of inflation on an economy-wide scale. The weight for primary articles is only 22.61%, reflecting the structural changes in the economy. The updated WPI table is given in the table below.

[table id=12 /]

Consumer Price Index:

CPI is the retail price average of a basket of goods and services directly consumed by people. CPI is a more accurate benchmark for Inflation than WPI. CPI is computed separately by Ministry of Statistics and Programme Implementation for the following groups. You can check the CPI data attached here.

  1. CPI urban
  2. CPI rural
  3. CPI combined

GDP Deflator:

The GDP Deflator is arrived at by dividing GDP at current prices by GDP at constant prices in terms of base year prices. This indicates as to how much of growth in GDP in a year is due to price rise and how much due to increased output.

GDP Deflator, which distinguishes between physical growth in output and price rise, gives an accurate picture of the overall price level. Theoretically, the growth in physical output in an economy has to be matched by a corresponding growth in monetary flows.  Any mismatch between the two gets reflected in the growth rate and price changes. Any mismatch between the two gets reflected in the growth rate and price changes. Monetary Policy aims at managing the balance between growth in real flows and growth in monetary flows.

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