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What is the meaning of Inflation rate ?
What is inflation? Inflation is the rate of increase in prices for goods and services. In other words - Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. The inflation rate is a key parameter basis which central government proposes its monetary and fiscal policy from time to time. Indicators of Measure of Inflation Whole-sale price index (WPI) and Consumer price index (CPI) are the two primary measures of inflation. WPI index reflects average price changes of goods that are bought and sold in the wholesale market. As WPI accounts for changes in general price level of goods at wholesale level, it fails to communicate actual burden borne by the end consumer. The computation of CPI takes into account price changes and the actual inflation that affects the end consumer. CPI is thus a reflection of changes in the retail prices of specified goods and services over a time period which are traded by particular consumer group Wholesale Price Index (WPI) This index is published by office of Economic Adviser (Ministry of Commerce & Industry).The calculation is done by tracking the average prices of commodities that are traded in bulk i.e. wholesale. The commodities under study are divided into three categories: primary articles (food, non-food, tobacco, fodder and minerals), fuel & power and manufactured products. Currently, the total basket of products under consideration for WPI is 676 items and the calculation of this index is done by using Laspeyres formula (it works on averaging principle) and year (2004-2005) commodity prices are taken as base for reference by equating them to 100 and values of the index are calculated as a percentage relative to this base.
Consumer Price Index (CPI) This index is published by Central Statistics Office (CSO) (Ministry of Statistics and Programme Implementation).In nations like United Kingdom, Poland, Malaysia etc. it is also known as Retail Price Index. CPI is a method that involves calculation of inflation through time tracking of weighted averages of 200 consumer goods and services with prices of year 2010 as the base. So which is the better index for measuring inflation? The primary disapproval for WPI being used as the key index for estimating inflation is that the general public doesn’t transact on wholesale level on a daily basis. Also, the wholesale doesn’t reflect the pricing trends at retail level and thus, not the definitive ideal indicator of inflation. On the other hand, many analysts feel that CPI is the accurate method of measuring inflation since it reflects the ground realities by tracking the costs of the goods that are purchased on daily basis by general public. The difference between Wholesale Price Index (WPI) and Consumer Price Index (CPI) is that along with tracking prices of goods, the latter also includes services in the indexing. Most of the countries use CPI as the measuring index since it represents actual variation in prices of the items that a consumer will ultimately make use of. Also, CPI has an updated base in comparison to WPI. Earlier, RBI had given more weightage to WPI as a measurement index. However, on April 2, 2014 during the first bimonthly monetary policy for FY2014-15, Mr. Rajan (RBI governor) declared that CPI would be the key index of inflation measurement going forward.
What is the relationship between inflation and interest rates? Inflation and interest rates are linked, and frequently referenced in macroeconomics. Inflation refers to the rate at which prices for goods and services rises. In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to have less money to spend. With less spending, the economy slows and inflation decreases.
When Inflation Numbers are published The inflation numbers are published every 2nd Friday of a month What is Deflation Deflation is the continuous decrease in prices of goods and services. Deflation occurs when the inflation rate becomes negative (below zero) and stays there for a longer period Historically Historically, from 1969 until 2012, India Inflation Rate averaged 8.0 Percent reaching an all time high of 34.7 Percent in September of 1974 and a record low of -11.3 Percent in May of 1976.