Inflation

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INFLATION: Inflation means a persistent rise in the prices of goods and services which reduces the
purchasing power of money; particularly poor are worst hit as a greater proportion or their salary or
entire salary is spent on securing basic amenities and there is little scope to cut back on savings or
luxury goods, thus, they have compromise with the basic amenities such as food, clothing, etc, at
times.
TYPES OF INFLATION
Depending upon the rate of growth of prices i.e. on the percentage of inflation, it is of various types.
1) Creeping Inflation: when rate of general price increase is 1 - 5 %
2) Trotting Inflation: when rate of increase is 5 - 10 %
3) Galloping Inflation: when rate of increase is 10- 20 %
4) Runaway Inflation: inflation > 20%
5) Hyper-Inflation: inflation totally out of control
Based on the reasons of inflation, it can be of three types:
1) Demand-Pull Inflation: inflation caused by increase in demand or when 'too much money is
chasing too few goods '
2) Cost- Push Inflation: caused by reduction in supply, also called Supply Shock Inflation when such
changes increase price rapidly.
3) Structural Inflation: persistent inflation caused by deficiencies in structure of economy like
backward agriculture
Some other reasons for inflation can be:
1) Speculation
2) Cartelization
3) Hoarding
Measuring Inflation
To measure 'general fall or rise and rate of change of prices ' different countries use different ways
like GDP deflator, Cost of living Index, Producer price Index, Wholesale price index, Consumer price
index and others. In India, to check the general trend of price levels, we use two levels: Wholesale
level and Retail level. Wholesale level of prices form the Wholesale Price Index (WPI) and retail level
forms Consumer price Index (CPI)
Wholesale Price Index
The Wholesale Price Index or WPI is 'the price of a representative basket of wholesale goods'. WPI
figure was released weekly on every Thursday but since 2009 it has been made monthly. The
Wholesale Price Index focuses on the price of goods traded between corporations, rather than
goods bought by consumers, which is measured by the Consumer Price Index. It includes 676 items
that includes agricultural commodities (such as Rice, Tea, Raw Cotton), industrial commodities
(such as Iron Ore, Bauxite), intermediate products for industry (such As Cotton Yarn, Iron and Steel),
products for consumers (such as Atta (Wheat Flour), Sugar, Electricity, Ceiling Fans, among others)

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and energy items (Petrol, Kerosene). The WPI is an indicator designed to measure the changes in
the price levels of commodities that flow into the wholesale trade and is very vital guide in economic
analysis and policy formulation. But one of the biggest drawbacks of WPI is that it does not include
services which CPI includes like transport, health, education etc.
Consumer Price Index
A Consumer Price Index or CPI measures changes in the price level of a market basket of consumer
goods and services purchased by households. The CPI is a statistical estimate constructed using
the prices of a sample of representative items whose prices are collected periodically. In India, we
have two CPI i.e. CPI for industrial workers (CPI-IW) and CPI for agricultural labour (CPI-AL) (third
CPI Urban Non-Manual Employees, CPI-UNME was discontinued in 2008). Each track the retail
prices of goods and services for specific group of people and its main purpose is to measure the
impact of price rise in rural and urban poverty.
CPI gives larger weight on food items than WPI and therefore is more sensitive to changes in prices
in food items whereas the change in International crude prices has greater bearing on WPI as fuel
gets higher weightage in WPI. Inflation targeting in India is done on the basis of CPI figures and
further is recommended to move towards PPI figures.
Issues concerning Inflation in India
Inflation in India is quite a thing to worry not just for economists, and government but for people in
general because it reduces their purchasing power. The other bad effects of inflation can be
summarised as below:
1) It can drag down growth as interest rate are raised to trap the excess money causing inflation and
cost of credit increases
2) Low income group people are especially hurt because of high prices.
3) Increases uncertainty and discourage investments sand saving (with increasing prices people are
more inclined to spend than to save)
4) Discourages exports as domestic sales are attractive and Balance of Payment problems can
arise.
Hence altogether inflation is bad for any economy and should be under control. This gives us a hint
of euphoria on reaching towards a 'zero inflation 'figure. But then small amount of inflation is needed
for a developing economy. Small price rise is necessary for wage to go up. It also keeps the
economy to stay away from the deflation which can otherwise set off a recession. Small inflation is
also necessary for producers and investors which give them incentives to produce and invest. But
the slight inflation should not be Structural inflation or caused due to cartelization, hoarding or
speculation. It should be driven by Innovation in economy which presents new products and services
thus creating new jobs and fuelling the wheels of commerce. Chakravarty committee (1985) had
suggested 4% as an acceptable level of inflation on a long- term basis but has to be seen w.r.t
growth rates and global levels. For RBI 5.5% inflation is considered as acceptable which does not
hurt people nor hurts growth.

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Reasons for Present Inflation Fall towards Zero Inflation
According to economists, the healthiest ways to keep inflation under control for India are curbing
structural inflation which is created because of wrong administrative set-ups, misplaced government
policies and infrastructural constraints. In India the high Inflation is often caused due to lack of
storage facilities for agricultural produces, bad monsoon, rise in MSP for agro-products, non proper
implementation of PDS, hoarding and cartelization which all has to be addressed through
governmental interventions. But present fall in inflation can be attributed to reason below:
1) International crude prices have fallen to half of its earlier prices. Crude oil occupies a very
significant proportion of total basket of goods in the index. Hence its effect is direct and lowering of
oil prices also has indirect effect on prices of other commodities in the basket. Hence the fall in crude
prices is one of the most important reasons behind the 'zero Inflation'.
2) In CPI, food is given around 50% of the weightage which mainly contains cereals. The MSP in
recent times has not been increased in cereals which has a direct effect on the prices. It indirectly
leaves less money in the hands of people and also causes less demand for goods.
3) Demand compression is further caused due to stagnant social spending like on NREGA and other
schemes. Rural wages growing at lower rates, Lower agricultural growth and declining industrial
production is also contributing to the Demand Compression.
4) Tight monetary policy by RBI and no decrease in rates is further sustaining the declining inflation
figures and also creating lesser demand due to lesser money in market.
5) As claimed by some, the reason cannot be directly related to the structural improvements in
economy. The new government has put in motion some reforms measures but still it is in draft phase
and small measures like going strict on hoarders and cartels is insufficient to show the result we are
witnessing.
Consequences of Zero Inflation
When prices come down, it's poor who are at receiving end of benefits. There is an expectation
spiral built into high inflation rate which tends to raise demands for wage. The zero inflation economy
enables the authorities to reduce the price distortion; it also reduces the uncertainty involved in price
drift. The zero inflation also aids in enhancing the economic growth along with adding liquid money
to the economy. In such an environment the corporation is in a better position to plan for the
economy and implement new rules, policies for the betterment of the economy. The government can
cope better with the problems as they do not have to face the sudden shocks of supply. There is an
accumulation of long-term investments as the investors are willing to invest money for a long time
without any risk.
The key reasons of present decline in inflation are fall in fuel prices and food prices, which are quite
volatile and subject to fluctuations and/or seasonal in nature. This kind of inflation reduction may not
be sustainable and may go up again and such price changes are not within the control of monetary
policy.