Inflation: What is it and Why Does it Matter? Inflation in India
Inflation: What is it and Why Does it Matter?
What
Inflation in India
Inflation is a term that you might have heard a lot in the news or in your economics class. But what does it mean and how does it affect you? What it is, how it is measured, what causes it, and why it is important for the economy and your personal finances.
What is Inflation?
Inflation is the gradual rise in the price of goods and services over time. It means that you have to pay more money to buy the same things that you used to buy before. For example, if a kilo of rice cost Rs. 50 last year and Rs. 55 this year, then there is an inflation of 10% in the price of rice.
It reduces the purchasing power of your money. It means that you can buy less things with the same amount of money. For example, if you have Rs. 1000 and the inflation rate is 10%, then you can buy 20 kilos of rice this year, but only 18 kilos next year.
It also affects the value of your savings and investments. If the inflation rate is higher than the interest rate that you earn on your savings account or fixed deposit, then your money will lose value over time. For example, if you have Rs. 10,000 in a savings account that earns 5% interest per year, but the inflation rate is 10%, then your money will be worth only Rs. 9,545 after one year.
How is Inflation Measured?
In India, there are two main indicators that are used to measure inflation: the Wholesale Price Index (WPI) and the Consumer Price Index (CPI).
The WPI measures the changes in the prices of goods that are sold in bulk or wholesale markets, such as raw materials, fuel, metals, etc. The WPI covers about 700 items and has a weightage of 64.23% for manufactured products, 22.62% for primary articles (such as food and agriculture), and 13.15% for fuel and power.
The CPI measures the changes in the prices of goods and services that are bought by consumers, such as food, clothing, housing, education, health care, etc. The CPI covers about 300 items and has a weightage of 45.86% for food and beverages, 28.32% for miscellaneous items (such as transport and communication), 10.07% for housing, 6.84% for fuel and light, 6.53% for clothing and footwear, and 2.38% for pan, tobacco and intoxicants.
Both the WPI and the CPI are calculated by the Ministry of Statistics and Programme Implementation (MOSPI) every month based on data collected from various sources across the country.
What Causes Inflation?
There are many factors that can cause inflation in an economy. Some of the common ones are:
– Demand-pull inflation: This happens when there is an increase in the demand for goods and services that exceeds the supply. This can be due to factors such as population growth, income growth, consumer preferences, government spending, etc.
– Cost-push inflation: This happens when there is an increase in the cost of production of goods and services that is passed on to consumers. This can be due to factors such as rise in wages, taxes, raw materials prices, fuel prices,
exchange rates, etc.
– Money supply inflation: This happens when there is an increase in the amount of money in circulation that exceeds the growth of output or production. This can be due to factors such as printing of money by the government or central bank,
deficit financing, foreign aid or loans, etc.
Why Does Inflation Matter?
It has both positive and negative effects on the economy and society.
Some of the effects are:
– Positive effects: Inflation can stimulate economic growth by encouraging consumption and investment. It can also reduce the real value of debt and make exports more competitive.
– Negative effects: Inflation can erode the purchasing power of money and reduce the standard of living of people. It can also create uncertainty and instability in the economy and affect savings and investment decisions. It can also worsen income inequality and poverty.
Therefore, it is important to maintain a moderate level of inflation that is neither too high nor too low. The Reserve Bank of India (RBI) has set a target range of 2-6% for CPI inflation as its main objective.
Thank you for reading this post. I hope you found this informative and useful. Please share your thoughts, opinions, and suggestions in the comments below.
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