TEST SERIES 
Date : 14 Dec 2021
Inflation spike
Tags :Why in News?
- India’s retail inflation hardened for the second month in a row in November touching 4.91% from 4.48% recorded in October, with urban parts of the country experiencing a sharper rise in prices at a pace of 5.54% and vegetable prices jumping 7.45% from the previous month.
What is inflation?
- Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
- Inflation measures the average price change in a basket of commodities and services over time.
- The purchasing power of a currency unit decreases as the commodities and services get dearer.
- This also impacts the cost of living in a country.
- When inflation is high, the cost of living gets higher as well, which ultimately leads to a deceleration in economic growth.
- A certain level of inflation is required in the economy to ensure that expenditure is promoted and hoarding money through savings is demotivated.
The Ministry of Statistics and Programme Implementation measures inflation.
How is Inflation measured?
- In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index), which measure wholesale and retail-level price changes, respectively.
- The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics, etc, which Indian consumers buy for use.
Four types of CPI are as follows:
- CPI for Industrial Workers (IW).
- CPI for Agricultural Labourer (AL).
- CPI for Rural Labourer (RL).
- CPI (Rural/Urban/Combined).
- The first three are compiled by the Labour Bureau in the Ministry of Labour and Employment.
- Fourth is compiled by the Ministry of Statistics and Programme Implementation.
The goods or services sold by businesses to smaller businesses for selling further are captured by the WPI.
- Services are not included in WPI.
- Published by the Office of Economic Adviser, Ministry of Commerce and Industry.
- In India, both WPI (Wholesale Price Index) and CPI (Consumer Price Index) are used to measure inflation.
Reasons for Inflation:
Cost-Push Inflation
- Cost-push inflation occurs when prices increase due to increases in production costs, such as raw materials and wages.
- The demand for goods is unchanged while the supply of goods declines due to the higher costs of production. As a result, the added costs of production are passed onto consumers in the form of higher prices for the finished goods.
Demand-Pull Inflation
- Demand-pull inflation is caused by strong consumer demand for a product or service.
- When there's a surge in demand for a wide range of goods across an economy, their prices tend to increase.
Is Inflation bad for everyone?
- A certain level of inflation is required in the economy to ensure that expenditure is promoted and hoarding money through savings is demotivated.
- A certain level of inflation is always desired in the case of a developing nation.
Terms related to inflation:
- Disinflation: It is a temporary slowing of the pace of price inflation and is used to describe instances when the inflation rate has reduced marginally over the short term.
- Stagflation: It refers to an economic condition where inflation is high but economic output or growth is low and unemployment is also high.
- Deflation: It is the general decline of the price level of goods and services. Deflation is usually associated with a contraction in the supply of money and credit, but prices can also fall due to increased productivity and technological improvements.
- Reflation: It is an act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy back up to the long-term trend, generally following an economic slowdown or recession.
Sources: The Hindu, Investopedia
