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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.

    • 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 CPI ( 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.