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Inflation

Reviewed by Anjaneyulu | Updated on Sep 30, 2020

Catalogue

Introduction

Inflation is a quantitative measure of the rate at which an economy raises the average price level of selected goods and services over a period of time. It is the steady rise in the general price index, where a unit of currency buys less than it did in previous times. Inflation often expressed as a percentage means a decrease in the purchasing power of the currency of a nation.

Types of inflation

The following are some types of inflations in India

  • Wholesale or headline inflation is calculated against the wholesale price index (WPI) changes. Because it is dependent on the wholesale prices, it lets the government spot the price rise in advance. However, wholesale inflation lost its relevance when the government decided to change the frequency of reviewing the index. Also, the Reserve Bank of India shifted its monetary focus from wholesale to retail inflation.

  • Retail inflation is calculated based on changes in the Consumer Price Index (CPI). Because it tests the effect of price rise, it is more critical to the financial planning of the average investor.

  • Food inflation is a subset of wholesale inflation and is expected to continue to grow in the months ahead due to a deficit in the monsoon rains.

  • Housing Inflation is yet another sub-set of wholesale inflation. Similar to the wholesale inflation, it was rising at a faster clip and was above 15 percent two years ago.

Inflation Rates in India

Many developing countries use changes in the CPI as their central measure of inflation. In India, CPI (combined) is declared as the new standard for measuring inflation (From April 2014). CPI numbers are typically measured monthly, and with a significant lag, making them unsuitable for policy use. India uses changes in the CPI to measure its rate of inflation.

According to the monthly economic report for November 2019 released by Ministry of Finance, the inflation rates are as follows:

  • Consumer Price Index (CPI) – Combined inflation was 3.7 percent in April-November 2019, as compared to 3.9 percent in April –November 2018.

  • CPI-combined inflation was 5.5 percent in November 2019 as compared to 4.6 percent in October 2019.

  • Food inflation based on Consumer Food Price Index (CFPI) increased to 10.0 percent in November 2019 as compared to 7.9 percent in October 2019, mainly due to increase in inflation of cereals and products, milk and products, oils and fats, vegetables, pulses & products, spices, sugar and confectionery.

  • WPI inflation rate increased to 0.6 percent in November 2019, as compared to 0.2 percent in October 2019.

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