[Economics] Inflation related concepts
Ranjith
Inflation:
In a crude term, It’s the increase in the price of a product.
Ways to measure inflation is through price indices in India:
· Wholesale Price Index
· Consumer Price Index
Price Index calculation:
NEW value of CPI/WPI - OLD value of CPI/WPI
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OLD value of CPI/WPI
|
SI.No. |
Wholesale Price Index |
Consumer Price Index |
|
1. |
It reflects average price changes of goods that are bought and sold in the wholesale market. |
It takes into account price changes and the actual inflation that affects the end consumer. |
|
2. |
It is also called as ‘Headline Inflation |
|
|
3. |
Compiled by Office of Economic Adviser ->Ministry of Commerce and Industry calculates - WPI. |
Compiled by Central Statistical Organisation (CSO) -> Ministry of Statistics and program implementation calculates - CPI. |
|
4. |
Weightage: 1. Primary Articles (food,fruits etc):22% 2. Fuel, Power, Light & Lubricants :14% 3. Manufactured Products (biscuit,toothpaste):63% |
Weightage: 1. Food items 2. Pan, Supari, Tobacco & Intoxicants 3. Fuel & Light 4. Housing 5. Clothing, Bedding & Footwear, and 6. Miscellaneous (Medical, Education, etc) |
|
5. |
Total number of items included in the basket: 676 |
Total number of items included in the basket: 200 |
|
6. |
For WPI, base year is 2004 |
For CPI, base year is 2010 |
|
7. |
It’s calculated using Laspeyres formula. |
It’s calculated using utility-based calculation |
|
8. |
Subdivided as: · Core Inflation (by IIP) · Food & Fuel Prices |
Subtypes: 1. Entire urban population 2. Entire rural population 3. Urban + Rural (Consolidation) |
|
9. |
It does not includes the cost of services. |
It includes services in price index calculation. |
|
10. |
When RBI and Government make policies, they mainly pay attention to this number. |
Not much importance given in policy change, but it is mainly considered in developed countries |
Others related to Inflation:
· Core Inflation: it is Headline inflation(WPI) minus food and fuel prices. The food and fuel prices keep changing based on season and external factors. Hence, headline inflation gives a very volatile number. The policymakers, cannot use this number to make future predictions or long-term policies, so they also keep a separate watch on Core-Inflation number.
· GDP Deflator: Inflation can also be measured by annual growth rate GDP. By comparing real and nominal GDP.
· RESIDEX index was launched in 2007. This index records the changes in the prices of residential buildings. According to the RESIDEX, the housing prices have declined in Hyderabad, Banglore and Jaipur (from 2007 to 2012) but they have increased by more than 100% in Pune, Bhopal and Chennai.
· Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy.
· Stagflation: Both unemployment and inflation rates are high and growth rate is low. Contradicts Phillips curve.
· Inflation indexed bonds: Government introduced it in 2012-13 budget, to reduce investments on gold and in turn reduce Current Account Deficit(CAD). The interest rates for this savings is tied to the inflation rate ie., Real interest rate = Nominal interest rate - The inflation rate
Recent trends in Inflation (Based on Economic Survey):
· Usually high economic growth is attached with high inflation. But our case is unique, even in economic slowdown, inflation, especially of food items, is above the accepted level of 4-6%.
· WPI inflation has been coming down in recent months. However, food inflation, after a brief slowdown, continues to be higher than overall inflation. Given the higher weightage to food items in CPI, CPI inflation has remained close to double digits.
· Urgent steps need to be taken to reduce government spending so as to contain inflation.
· Part of the reason for the general slowdown in consumption could be that higher inflation tends to reduce real disposable incomes of households.
Reference:
http://www.tradingeconomics.com/
Economic Survey of India 2012-13