Inflation In India

B Arun Kumar
Manoj Pradhan
Sayed Afraz

Contents
 Inflation – Meaning, Impact, Causes, Types
 Index Number – Meaning
 Index Number – As a measure of Inflation
 WPI and CPI
 WPI – Concept and Construction
 Limitation of WPI
 CPI – Concept and Construction

INFLATION
 A measure of rise in the general price level or
equivalently average level of prices of all the goods
and services in an economy
(does not necessarily mean that the prices of all the
goods and services in an economy rise).
 When inflation goes on there is a decline in the
purchasing power of money.
In other words inflation refers to “too much money
chasing too few goods”

Impact of Inflation
 Redistribution of wealth with no regard to
social goal.

Causes of Inflation
 Factors on Demand side
Increase Public Expenditure
Increase in Disposable Income
Increase in Investment
 Factors on Supply side
Increase in Factor Payment
Increase in Taxes
Increase in regulated prices

Types of Inflation
 Demand Pull Inflation
 Cost Push Inflation

Demand Pull Inflation
 This occurs when there is excess aggregate
demand in the economy (overall) or in a
specific market or industry.
Businesses respond to high demand by
raising prices to increase their profit margin

Cost Push Inflation
 This occurs when costs of production
or operation are increasing.
 Cost Push inflation is mainly caused
due to the following factors:
· Increase in wages.
· Increase in cost of raw materials
· Increased cost of
imported components
(import-push inflation)

Measurement of Inflation
 Inflation is measured using Index Numbers

Index Numbers
 An index number is a single figure that
shows how the whole set of related variables
has changed over time or from one place to
another.
Examples of Index Number are: Price Index,
Index of Industrial Production

Important Methods for
Computation of Index Numbers
 Unweighted
 Weighted
- Laspeyre
- Paasche
- Fisher
- Marshall Edgeworth

Price Index
 It reflects the overall change in a set of
prices paid by a person. It is calculated for
economic planning and policy formulation.

Purpose of Computing Index
Numbers
 The purposes for Computing price index
are:
 A measure of general price level,
 A price deflator
 Purchasing power per unit currency
 A measure of comparing price
movement among different sectors of an
economy, and
 An aid to business forecasts

Price Indices - Types
 An indicator of the average price movement
over time of a fixed basket of goods and
services is the Price Index. The item basket
of goods and services is determined in view
of whether the changes are to be measured
in retail, wholesale price etc. Hence the
Price Indices which are computed in India
are:
 Wholesale Price Index
 Retail Price Index

Wholesale Price Index (WPI)
WPI is the Index that is used to measure the
change in the average price level of goods
traded in wholesale market.
WPI is the price of a representative basket of
wholesale goods.
In India WPI was released earlier on weekly
basis on every Thursday but now it is update
in monthly basis.

Contd. . . .
 The purpose of WPI is to monitor price
movements that reflect supply and demand
in industry, manufacturing and
construction.
 The current base year of WPI is 2004-05.
 WPI uses a sample set up 676 commodities
for inflation calculation.
 In WPI the price is taken rom wholesale
market.

Methods for Computing Wholesale
Price Index
There are many methods for calculating
wholesale price index but mainly Lasperyre’s
formula used for calculating wholesale price
index.

Lasperyre’s Method
 In this method WPI is calculated through
this formula-:
WPI=
𝑝1 𝑞0
𝑝0 𝑞0
×100
Where,
𝑝1 = Price of the current year.
𝑝0 = Price of the base year.
𝑞0= quantity of the base year.
Computation of Inflation – Example.xlsx

Consumer Price Index (CPI)
 Consumer price index refers to the change
in the general price level over a period of
time which is paid by the ultimate
consumers for necessary goods and services
such as food, clothes, medicines etc.
 It also refers to the change in the general
price level from base year to current year
 It is also known as cost of living index.

Uses of Consumer Price Index
Numbers
 Consumer price index helps to calculate the
real wages of the employee
 It helps to determine change in the purchase
power of money
 CPI used for calculating allowances for
employees such as D.A., incentives etc.
 They are used for comparing changes in the
cost of living of different classes of people.

CPI in India
 CPI is computed in India
for Rural Area
for Urban Area
for Combined of Rural and Urban Areas
 Upto January, 2015 the CPI is computed with
Base year 2010
 The inflation figure for February, 2015 is
published with some methodological and
base changing to the year 2012.

New Weights
Food and Beverages 45.86
Pan, Tobacco and
Intoxicants 2.38
Clothing and Footwear 6.53
Housing 10.07
Fuel and Light 6.84
Miscellaneous 28.32
Total 100
Total No. of Items are 448 in Rural and 460 in Urban

Other Methodological Changes
 Weight has been assigned using the
Consumer Expenditure Survey(2011-12).
 In the new series consumption are collected
according to the purpose of consumer.
 Geometric mean used instead of arithmetic
mean.

Methods for Computing Consumer
Price Index
 There are two methods of computation of
consumer price index number. These are –
 Aggregative expenditure method.
 Family budget method.

Aggregative Expenditure Method
 In this method CPI is calculated through this
formula-
Consumer price index=
𝑝1 𝑞0
𝑝0 𝑞0
×100
Where,
𝑝1 = Price of the current year.
𝑝0 = Price of the base year.
𝑞0= quantity of the base year.

Family Budget Method
 In this method CPI is calculated through
this formula-
Consume price index=
𝑃𝑉
𝑉
(Using AM)
Antilog(
𝑉𝑙𝑜𝑔𝑃
𝑉
) (Using GM)
P=
𝑝1
𝑝0
×100 for each item
V=value of weights, i.e. 𝑝0 𝑞0
Computation of Inflation – Example.xlsx

Inflation In India

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