Inflation

Inflation
A persistent rise in prices in an economy over a period of time A state of the economy where too much money chases too few goods Moderate rate of inflation desirable inflation rate is calculated as the percentage rate of change of a certain price index Inflation does not fall it slows down or speeds up! (If inflation in 2007 was 6% and in 2008 is 2% it still means prices have risen by an average of 2% over the last year!) A fall in the price level is termed deflation

Inflation - Types
Moderate / Creeping inflation- When increase in price level is small and gradual beneficial for the economy as it induces investments. Running inflation- When Creeping inflation persists for a long period without any monetary and fiscal control it may lead to running inflation (8-10%). If not controlled it may affect savings and investment in the economy and affect economic growth. Galloping Inflation- When monetary authorities completely lose control on running inflation, and price levels increase at 2 or 3 digit rates. People expect prices to rise and so spend all their Money income as soon as possible. Hyper Inflation Inflation rate in four digits or more
3/15/2013 Macro Eco ITM 3

WPI / CPI Baskets

WPI : Weightage according to shares in total output produced: Primary articles- 98- (food & non-food, minerals): 22% Fuel, power, light & lubricants- 19- : 14% Manufactured products- 318: 64% CPI : 4 types of Baskets Industrial Workers (CPI-IW) Urban Non-Manual Employees (CPI-UNME) Agricultural Labourers (CPI-AL) Rural Labourers (CPI-RL) Weightage of each commodity according to share in household expenditure

How is WPI (Wholesale Price Index) calculated?

Set of 435 commodities and their price changes are used for the calculation Represent various strata of the economy and comprehensive WPI value for the economy Calculated on a base year and WPI for the base year is assumed to be 100 To show the calculation, lets assume the base year to be 1970. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered. Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10

How is WPI (Wholesale Price Index) calculated?

The WPI of wheat for the year 1980 is, (Price of Wheat in 1980 Price of Wheat in 1970)/ Price of Wheat in 1970 x 100 i.e. (6.10 5.75)/5.75 x 100 = 6.09 Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 = 106.09. In this way individual WPI values for the remaining 434 commodities are calculated and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. Commodities are given weight-age depending upon its influence in the economy.

Current Inflation- Major Reasons

Oil price increase (cost push factor) Increase in the world agricultural commodity prices Money Supply growth rate in the last year touched 21% - considered high

3/15/2013

Macro Eco ITM