Inflation Explained. Inflation for beginners, Inflation meaning in Hindi, Causes of inflation, Inflation rate in India 2023
Inflation: The Invisible Monster
In this article, we shall discuss how inflation affects our day-to-day life. If you are living in India then instead of inflation you must have heard your mummy complaining that "mehngai" is increasing day by day when she comes home after buying the monthly groceries. Yes, you got it right, that’s inflation. I am sure that in the past 1 year, you must have heard a lot about rising inflation. We shall cover the causes of inflation and the different types of inflation such as demand-pull and cost-push inflation. You would also know the current inflation rate in India after reading this article. To see the part, you are interested you can check the table of contents.
Table of Contents
Inflation Meaning
Inflation Meaning in Hindi
How is Inflation measured and What is CPI
Inflation in India
CPI (Consumer price index), WPI (Wholesale price index)
Inflation rate Formula
Causes of Inflation: Demand-pull inflation, Cost-push inflation
Difference between Demand-pull and Cost-push inflation
Conclusion
Inflation Meaning
Inflation is a situation where the general level of prices for goods and services in an economy increases over time. This means that the purchasing power of the currency decreases, as the same amount of money can buy fewer goods and services than before.
I am sure that you must have first-hand witnessed this while growing up. Your favourite food item that you relished eating during your teenage years certainly costs more today. Sometimes it may be 8-10 times what it costs back then.
An economy may be affected by inflation in both good and bad ways. On the one hand, it can encourage spending and investment, as people may want to buy goods and services before prices increase even further. It can also increase the profits of businesses, as they can charge higher prices for their goods and services.
Inflation Meaning in Hindi:
मुद्रास्फीति एक ऐसी स्थिति है जहां किसी अर्थव्यवस्था में वस्तुओं और सेवाओं की कीमतों का सामान्य स्तर समय के साथ बढ़ता है। इसका मतलब यह है कि मुद्रा की क्रय शक्ति कम हो जाती है, क्योंकि उतनी ही राशि से पहले की तुलना में कम सामान और सेवाएं खरीदी जा सकती हैं|
How is Inflation measured and What is CPI??
Inflation is calculated in the CPI by comparing the price of a basket of goods and services in a given period to the price of the same basket in a previous period. The percentage change in the prices over time represents the inflation rate. (Soon we shall learn about CPI)
The basket of goods and services used in the CPI is determined through a survey of consumer spending patterns. The survey identifies which goods and services are most commonly purchased by households, and how much of their budget is spent on each item. These items are then assigned a weight based on their relative importance to household spending.
To calculate the CPI, the prices of the items in the basket are collected in various regions of the country. The prices are then weighted according to the importance of the item in the basket, and a price index is calculated. The CPI inflation rate is then calculated by comparing the price index in the current period to the price index in the previous period. The percentage change in the price index represents the inflation rate for that period. It is an important tool for measuring inflation and tracking changes in the cost of living for households. It provides valuable information for policymakers, businesses, and consumers in making economic decisions.
Inflation in India
The average inflation rate in India over the past 50 years has been around 6.95% per year. This is based on data from the Reserve Bank of India (RBI) from 1971 to 2021.
The inflation rate in India has varied over the years, with periods of high inflation followed by periods of relatively low inflation. For example, in the 1970s and 1980s, India experienced high levels of inflation, with rates reaching as high as 17% in some years. In the 1990s and early 2000s, inflation was generally lower, averaging around 5% per year.
However, in recent years, inflation has been higher, averaging around 6-7% per year. In 2020 and the after years, India and many major developing countries across the world experienced a sharp increase in inflation due to the disruption caused by the COVID-19 pandemic and the quantitative easing that happened.
The Ministry of Statistics and Plan Implementation in India calculates inflation.
Inflation rate (CPI) in India February 2023: 6.44%
Inflation rate in India for the past 12 months
Source: Trading Economics
Inflation rates in India from 1960 to 2020
Source: photo
How to Check the Inflation rate of any country
You can click on the link here and check the website. You would get the monthly inflation rates of all the major countries there. The data presented there is accurate and true.
WPI (Wholesale Price Index) and CPI (Consumer Price Index)
These are two different inflation indicators widely used in India to keep track of inflation.
CPI
I mentioned earlier that Inflation is calculated by CPI.
A basket of products and services that corresponds to the normal spending habits of households in the nation is used to compute the CPI. The basket contains a variety of things, including, among other things, housing, transportation, healthcare, education, communication, leisure, food and drink etc. To calculate the overall change in price, the prices of these goods are recorded over time.
The CPI is calculated by routine pricing surveys of a sample of retail stores and service providers across the nation or area. The prices of the items included in these surveys, which cover a representative sample of the basket's products and services, are gathered and tracked over time. The price adjustments are then weighted to reflect the respective relevance of each element in the basket and how much of each item households actually pay.
The base year is used as a benchmark for calculating the CPI, and it is typically changed every few years to account for changes in consumer purchasing trends. The percentage change in prices over time is then computed by comparing the current CPI to the base year CPI. In India, the base year for CPI inflation is 2012.
WPI
The Wholesale Price Index (WPI) is a statistical measure of the changes in prices of goods traded in bulk quantities in the wholesale market.
The Ministry of Commerce and Industry in India calculates the WPI using information gathered from wholesalers all around the nation.
The WPI includes a wide range of items, including manufactured goods, fuel and electricity, and primary articles (such as food and non-food agricultural products). The weighted average of these items' prices, which reflects their relative importance in the economy, is used to compute the index.
WPI inflation's base year is 2011–12.
Inflation rate (WPI) in February 2023: 3.85%
Source: Trading economics
Difference between the CPI and WPI
- Unlike the CPI, which measures prices at the retail consumer level, the WPI monitors prices at the level of production or manufacturing, taking into account items sold between enterprises.
- While the CPI also measures price changes for services, the wholesale price index figure solely takes into account changes in the price of goods.
- The Office of Economic Adviser, Ministry of Commerce and Industry, provides WPI statistics in contrast to the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI), which publishes CPI data.
Inflation rate formula
Inflation Rate = [(Current CPI - Previous CPI) / Previous CPI] x 100
Source: Inflation calculator You can click on the above link and even calculate the inflation rate by putting the values of the Current CPI and Initial CPI.
For CPI, the formula is 
Source: The investors book
Using the same formula, WPI can also be calculated.
Causes of Inflation-Demand-pull inflation, Cost-push inflation
Demand-Pull Inflation: When there are more people who want to buy a product or service than there are sellers who can provide it, prices of those items increase. This is known as demand-pull inflation. The reason the prices go up is because sellers know that buyers are willing to pay more to get what they want.
Eg; Let's say that there's a new smartphone that everyone wants to buy. The smartphone company can only produce a limited number of phones each month, but everyone who wants one is willing to pay a premium price for it. As a result, the company raises the price of the phone to maximize its profits.
The phrase "too much money chasing too few commodities" is used by economists to describe this phenomenon.
An easy tip for remembering this is DEMAND is pulling Inflation up.
Cost-push Inflation: Cost-push inflation is a scenario in which rising production costs lead to rising prices for products and services. The cost of manufacturing inputs like labour, raw materials, or energy has increased, which is what leads to this kind of inflation. Businesses are compelled to raise the pricing of their goods and services in order to preserve profit margins when manufacturing costs grow.
Eg-The increase in oil prices may be one instance of cost-push inflation. A rise in oil prices may have an impact on the whole economy. Businesses that use oil as a raw material or for transportation will see a rise in their production costs as a result of the rising price of oil. This can therefore result in an increase in the price of products and services like fuel, air travel, and shipping that rely on oil.
An easy tip for remembering this is PRODUCTION COSTS are Pushing Inflation up.
Hoarding:
Hoarders are individuals or groups of people who keep goods in storage rather than selling them. As a result, the economy is experiencing an excess of artificially produced demand, which results in inflation.
Population Growth:
The market's overall demand rises as the population of the country or area increases. As a result, inflation increases from excessive population demand.
Inflation expectations:
Inflation expectations refer to the anticipated rate of inflation in the future. These expectations can influence the behaviour of individuals and businesses, leading to changes in economic activity that can impact inflation at present.
For example, if individuals and businesses expect that inflation will increase in the future, they may take actions to protect themselves such as increasing prices or wages, to account for the expected increase in costs. This in turn can lead to higher inflation in the present as wages and prices rise (also known as the Wage-Price spiral).
As a result, inflation expectations may contribute to their own occurrence. When there is widespread anticipation of rising inflation, more inflation may actually occur. Correspondingly, if there are widespread predictions of reduced inflation, this might result in lower inflation rates as well. In order to make their monetary policy choices, central banks frequently keep a careful eye on inflation expectations.
Imported inflation:
The effects of inflation can be influenced by changes in the exchange rate as well as prices. Inflation will rise if the value of the native currency declines or depreciates. The costs of products and services produced abroad are higher than those produced at home. As a result, both businesses that employ imported inputs in their production processes and consumers pay more to buy the same imported items. In summary, imported inflation occurs when the prices of imported goods and services increase, leading to an increase in the cost of production and prices of goods and services in the importing country.
Printing more money can also cause inflation.
Difference between Demand-pull and Cost-push inflation
The table given below points out the difference between Demand-pull and Cost-push Inflation
| Demand-Pull Inflation | Cost-Push Inflation |
|---|---|
| Occurs when demand for goods and services exceeds available supply |
Occurs when production costs increase |
| Often associated with economic growth and expansion |
Often associated with supply-side factors such as increased raw material or labour costs |
| Can result from increased consumer or government spending |
Can result from supply disruptions or changes in taxes or regulations |
| Typically leads to higher prices and increased economic activity |
Typically leads to higher prices but decreased economic activity |
| Can be controlled through monetary policy such as raising interest rates or decreasing the money supply |
Can be controlled through supply-side policies such as reducing taxes or increasing productivity |
| Occurs when demand for goods and services exceeds available supply |
Occurs when production costs increase |
Conclusion:
In conclusion, inflation is a phenomenon that affects economies globally and can have significant impacts on consumers, businesses, and governments. Inflation can be caused by a variety of factors, including an increase in the money supply, a rise in demand for goods and services, or a decrease in the supply of goods and services. There are also several different types of inflation, such as demand-pull inflation and cost-push inflation. Measuring inflation is crucial for policymakers and economists, and several methods are used, such as the Consumer Price Index (CPI). Understanding the causes and types of inflation and how it is measured is essential for making informed decisions about economic policies and investments.
I am sure that you learned about inflation, its different types and the causes of inflation. If you have any questions for me, feel free to leave a comment. I would surely answer your queries. In the next week, I would be writing an interesting article. So, please do check it out. Thanks
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