Inflation is defined as an increase in the prices of general goods and services. As inflation increases every Rupee we own buys a smaller percentage of goods and services.
What are the causes of inflation?
Inflation has both positive and negative effects, that totally depend on the economic type. There are so many causes of inflation which can be further classified into two parts;
Demand-Pull Inflation
Cost-Push Inflation
Demand-Pull Inflation:
Demand-pull inflation arises due to high demand for a good or service Demand-pull inflation is when growing demand for goods or services meets insufficient supply, which drives prices higher. There are so many factors that influence demand for a commodity such as;
- Increase in income levels
- Increase in population
- Natural calamities
- Supply shortfalls
- Seasonal Commodities
- Inflation expectations
Cost-Push Inflation:
Cost-push inflation (also known as wage-push inflation) occurs when overall prices increase (inflation) due to increases in the factor cost.
- Increase in prices of raw materials
- Increase in wages
- Increase in taxes
- Increase in transportation costs
- Increase in warehousing cost
What are the stages of inflation?
Creeping Inflation:
(General range- 0-2%): Creeping inflation is a condition where the rate of inflation in an economy increases very slowly but continuously over a period of time. Usually, this types of inflation stage belong to developed nations like USA, UK, and Japan.
Trotting Inflation:
(General range- 2-10%): Trotting inflation is a condition where the rate of inflation in an economy increases at a range of 2-10% over a period of time. Usually, this type of inflation stage belongs to developing nations like India, and China.
Galloping Inflation:
(General range- 10-20%): Galloping Inflation is a type of inflation that occurs when the prices of goods and services increase by two-digit. Example like Pakistan.
Hyper Inflation:
(General range- >20%): Hyperinflation is a term to describe rapid, excessive, and out-of-control price increases in an economy. Examples like Zimbabwe, Somalia, and Valenzuela.
Measurement of inflation
a. Inflation measurement is the percentage change in the price of a basket of goods and services consumed by households. It is calculated by a formula using;
b. To measure inflation in India there are three major indices used one is Consumer Price Index (CPI) and another one is the Wholesale Price Index (WPI) and the third one is the Index of Industrial Production (IIP).
c. Consumer Price Index (CPI): The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The Price Statistics Division (PSD) of the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI) started compiling Consumer Price Index (CPI) separately for rural, urban, and combined sectors on a monthly basis with Base Year (2010=100) for all India and States/UTs with effect from January 2011. It revised the Base Year of the CPI from 2010=100 to 2012=100, incorporating many methodological improvements in consonance with the international practices with effect from January 2015.
d. Wholesale Price Index (WPI): WPI captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator. WPI (the base year 2011-12) reckons only basic prices and does not include taxes, rebate/trade discounts, transport, and other charges. The new series of Wholesale Price Index (WPI) with base 2011-12 is effective from April 2017. In the revised WPI basket, the number of items has been increased from 676 to 697.
e. The Index of Industrial Production (IIP): IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period. In India, the first official attempt to compute the Index of Industrial Production (IIP) was made much earlier than the first recommendation on the subject came at the international level. With the inception of the Central Statistical Organization (now known as the National Statistical Office (NSO)) in 1951, the responsibility for the compilation and publication of IIP was vested with it.
Read More: List of Indian States and their Capitals, 28 States and 8 Union Territories
Inflation Terminologies
a. Deflation
In economics, deflation is a decrease in the general price level of goods and services.
b. Reflation
Reflation is used to describe a return of prices to a previous rate of inflation.
c. Disinflation
Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation’s gross domestic product over time. It is the opposite of reflation.
d. Stagflation
Stagflation is the simultaneous appearance in an economy of slow growth, high unemployment, and rising prices.
e. Recession
A recession is a slowdown or a massive contraction in economic activities. A significant fall in spending generally leads to a recession.
f. Core Inflation
Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors.
g. Headline Inflation
Headline inflation is the raw inflation figure reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics (BLS).
