Tavagapedia

Inflation



Key Takeaways

  1. Inflation occurs when prices of goods and services are rising while the purchasing power of the country is decreasing.
  2. There are generally three types of Inflation: demand-pull Inflation, cost-push Inflation, and built-in Inflation.
  3. A particular level of Inflation is needed in the economy to promote expenditure in the current production of goods and services and to demotivate holding money in savings.
  4. In India, the ministry of statistics and program implementation measures Inflation.
  5. India’s central bank, i.e., The Reserve Bank of India (RBI), limits the inflation rate through its monetary policy.

Inflation is the rise in price levels of the commodities we use due to rising in price levels in the economy (consequent devaluation of the currency) and not because of improvements in the quality or quantity of the commodities.

Example

A pencil which used to cost less than Rs 1 decades back, now costs more than Rs 10, without any value additions since then.

Know more

The Central Statistical Office has categorized inflation indices as the consumer price index (CPI) and the wholesale price index (WPI), charting Inflation on retail and wholesale prices of different commodities, respectively.

Inflation can occur due to the prices of commodities used in the production of final goods and services, such as rising oil prices affecting transport costs, or Inflation could stem from demand surpassing supply, created by, say, an interest rate cut making credit available cheaply and boosting demand while supply remains limited in the short term. 

What do you mean by Inflation?

Inflation is the rise in the prices of goods and services, which includes day to day fundamental items such as food, transport, clothing, housing, etc. Inflation means the average price rise in overtime. And opposite to this, a fall in prices of goods and services is called deflation. Inflation is an indicator of declining purchasing power.

What are the three types of Inflation

Demand-Pull Inflation – Demand-pull Inflation emerges when the total demand for goods and supply is higher than the capacity of production in the market. An increase in demand with constant rate production creates a demand-supply gap. In this type of Inflation, demand is much higher than the production, which in turn increases the prices of goods and services.

Cost-Push Inflation – Sudden shortfall of supply leads to a surge in the cost of production, which increases the rate of Inflation. For example, soap and shampoo prices may rise if the chemicals used in making these become costlier. This is known as cost – pull Inflation. 

Built-in Inflation – When the cost of wages of the workers increases, to keep up with their demand, the firm increases the cost of production, which leads to the rise in the cost of goods.

What causes the inflation/inflation cause

Some of the significant reasons behind Inflation or the rise in prices are high demand and a low supply of goods. This creates a demand-supply gap, which leads to a boost in prices. Excessive circulation of money leads to Inflation as money loses its purchasing power. It is a consumer behavior if people have more money, they will spend more, which in turn increases the demand. 

The surge in the cost of production causes Inflation. Some economists believe Inflation is necessary for economic growth. However, beyond a specific limit, Inflation hurts both consumer and economic growth. So the government and the central bank work towards controlling Inflation in an ideal range.

Effects of Inflation

The purchasing power of a country decreases as the prices of goods and services increases. When Inflation gets high, the cost of living gets higher. High Inflation damages economic growth. A particular level of Inflation is needed in the economy to promote expenditure in the current production of goods and services and to demotivate holding money in savings.

Inflation in India

In India, the ministry of statistics and program implementation measures Inflation. India’s central bank i.e., The Reserve Bank of India (RBI), limits the inflation rate through its monetary policy by using tools such as repo rate, the reverse repo rate, CRR, etc. Inflation is measured by two indices in India, which is the Consumer Price Index (CPI) and Wholesale Price index (WPI). CPI and WPI measure retail and wholesale level price changes, respectively. CPI measures the rise in prices of commodities and services such as medical care, food, education, etc. WPI captures goods or services sold by a business to smaller businesses for selling further.