Business Communication - Inflation & Index Pranay Veer
Meaning!!! General rise in the price level Fall in the purchasing power of money Too much money chasing too few goods It becomes harmful once it goes out of control It occurs under the volume of money increases faster than the available supply of goods
Types of Inflation - Causes Demand pull Inflation: Aggregate demand > Aggregate supply of goods and services Prices of goods and services rise. Cost push inflation: Cost of production Rise in the prices of factors of production Prices of goods and services
How is it Measured? Consumer Price Index Wholesale Price Index
CPI - Consumer Price Index It measures changes in the price level of consumer goods and services purchased by households. Price of goods bought by consumers It tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.COST OF LIVING INDEX This actually measures the increase in price that a consumer will ultimately have to pay for Countries: USA , China, Australia, etc.
Wholesale Price Index (WPI) WPI was first published in 1902 Replaced by most developed countries by the CPI in the 1970s WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. It focuses on the price of goods traded between corporations Countries: India, Philippines
Composition of WPI(in India)Weight = 100%1. Primary articles (wt.=20.12%) - Cereals, pulses, Fruits and vegetables, egg, oil etc.2. Fuel power, Light and Lubricants (wt.=14.91%) Mineral Oil, Electricity, Coal Mining3. Manufactured Products (wt. = 64.57%) Sugar, edible oils, textiles, chemicals, iron & steel, machinery, transport equipment, etc
Basis & Facts Base Year: 2004-05 Data Release: Monthly basis No. of commodities: 674 Current Inflation rate: 6.55% (Jan 12) 2-year low
CPI – India India’s first ever annual inflation rate, based on the consumer price index (CPI) Rate -7.65%, January 2012 Rural retail inflation - 7.38% Urban inflation rate - 8.25% Consumer Price Index (CPI) - Introduced a year ago Exist alongside the prevailing Wholesale Price Index (WPI)
CPI Major Groups CPI data tracks retail prices in five major Groups Food, beverages and tobacco; Fuel and light; Housing; Clothing, bedding and footwear Miscellaneous The CPI also reflects price movements in the services sector (55%) Base Year: 2010
CPI Facts CPI which took into account the consumption patterns of all segments of the population. CPI is 1% higher than the Wholesale Prices Index. Help the Reserve Bank take effective monetary policy steps to deal with inflation
CPI Index Preparation Prepared by the Ministry of Labour. CPI will be in addition to the three retail price indices: Agricultural laborers Rural laborers Industrial workers New CPI - Ministry of Statistics and Program Implementation (MOSPI) Eventually expected to replace the Wholesale Price Index (WPI) as the benchmark inflation.
Impact of Inflation Rising food prices Commodity prices Essential goods prices Expensive borrowing Impact on stock markets The rich get richer and poor get poorer Loss to fixed income earners Loss to wage earners Economic growth