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Indian Economy / Price Indices and Inflation

Concept of Inflation

Inflation is a progressive rise in general level of prices leading to fall in the purchasing power of the money. In other words, it means too much money chasing too few goods. Inflation is also considered as one of the macro-economic aggregates.

To monitor the price rise, point to point comparison (in comparison with corresponding month of previous year) is used. 12 month average will be taken for calculating annual inflation rate.

For example, let Consumer Price Index (Combined) value for January, 2015 be 249.0 and for January, 2016 be 285.5, the inflation rate will be (285.5 - 249.0)/ 249.0 = 14.66%

Demand-Pull Factors for the Rise in Inflation

  • Mounting of government expenditure (those expenditures that are not necessary)

  • Deficit financing (borrowing) which also increases money supply

  • Uncontrolled growth of population

  • Role of black money

Cost-Push Factors for the Rise in Inflation

  • Increase in cost of the production due to rise in the cost of inputs

  • Taxation has a factor in rising cost

  • Administered prices (dual pricing system like Market and Public Distribution System)

  • Hike in the oil prices and global inflation.

Core Inflation

It is a measure of the long term inflation movement. It excludes relatively volatile commodities. It captures the real inflation in the economy. This is being calculated by RBI.