Saturday, 9 July 2011

Inflation - Specially for beginners !!!

Every media uses this word !!! Everyday we come  across this world at least 10 times !!! But how many of us know the basic concepts of inflation !??! In this post, I would try my level best to explain the term Inflation and its significance to best possible extent !!!

First what is inflation ?!!?

Inflation in India is calculated considering 435 commodities !!!

Average rise and fall (in price) of all these 435 commodities determine our inflation !!!

Let me give an easy example !!!

I purchase goods for my house every month !!! Last month (say June) I paid Rs. 4000 and this month (say July) I paid Rs. 4500 !!! Then the inflation will be,

Inflation Rate = (4500-4000)*100/4000 = 12.5 % with reference to June !!!

Here key points to be noted are, only total amount spent by me is considered !!! I might have also purchased some commodity for lesser price compared to previous month !!! But only average of all amount matters for this calculation !!!

Similarly, average of all 435 commodities only matter in deciding Inflation rate !!!

Also Inflation rate should always been calculated with a reference point !!! For above calculation, June month was the reference point !!!

In India, since Inflation rate is calculated every week, previous week value become reference for this week !!!

Now statistics reveal that fall in inflation rate is a negative symbol !!! Though the rate of commodities come down, it leads to raise in unemployment and falling production - which makes it extremely difficult for Govt to control !!!

Inflation can be seen in two ways - Long term and short term !!!

Let me take an example to explain it !!!

We travel in a village where there is no petrol pumping station !!! Our vehicle got dried off !!! You could see a small shop which sells petrol !!! But they demand some amount extra than actual !!! We pay for it !!! This additional amount is just a temporary one !!! This is an example for short term inflation !!! It is not because of actual scarcity between production and demand !!! But because of few other parameters !!!

Generally food and fuel are key contributors to short term inflation !!!

Long term inflation is caused due to increase in buying capacity of individual !!! Petrol consumption in India is a typical example !!! Earlier we had only a car for 10 houses !!! Now almost every house have a car !!! This also increases our demand for fuel !!! Hence prize hike takes place !!! Prize once raised, remains as such !!!

Now, what control does Government have over Inflation ?!?!

The important tool every Govt use to control Inflation is Monetary policy !!! It is nothing but increase or decrease in money supply / cash flow !!!

Typical example is Increase in interest rate of Car loans !!! This is the step by Govt, to reduce the number of car buyers !!! This is the reason why Govt introduced a concept called floating interest !!!


1. India uses Wholesale Price Index (WPI) to calculate inflation !!!
2. All developed countries started using Customer Price Index (CPI) from 1970 to calculate inflation !!!
3. Indian Inflation rate is published every week (on Thursday) where as CPI are released on monthly basis !!!
4. Indian WPI calculation is subjected to many controversies !!! Many people wanna India to adopt CPI methodology !!! But Govt denies it, since tracking price at customer level is poor in India !!!
5. The final shocking news is that, these 435 commodities were last updated on 1973-1974 !!! Many voices have been raised to renew the list - but no result till now !!!

These are some basic terms and knowledge I want my friends to possess about Inflation !!!

Hope this post was useful !!! Please refer this blog to your friends and relatives !!! Please find time to write back to us !!! Do vote in INDLI, INDIBLOGGER and DIGG, if we deserve !!!

1 comment:

  1. Thnks a lot...i got very gud exposure abt inflation....

    With Regards,