Inflation refers to the gradual increase in the prices of goods and services in an economy over time. It reduces the purchasing power of a currency unit. In simpler terms, as inflation rises, you can buy less with your money.
Key Points
- Price Increase: Inflation is not about a single price going up. It’s about a broad-based increase in the prices of many goods and services we consume regularly.
- Measured by Indexes: Economists track inflation using price indexes like the Consumer Price Index (CPI) which measures the average change in prices of a basket of goods and services representative of what a typical household consumes.
- Reduced Purchasing Power: As inflation rises, the same amount of money buys you less. For instance, if the inflation rate is 5%, ₹100 today will only buy you goods and services worth ₹95 next year.
- Impact on Economy: Inflation can have both positive and negative consequences. A little bit of inflation is generally considered healthy for economic growth. However, high inflation can be detrimental, eroding savings and leading to uncertainty for businesses and consumers.
- Causes of Inflation: There are various factors that can contribute to inflation, including rising demand for goods and services, supply chain disruptions, and government spending.
- Central Bank’s Role: Central banks like the Reserve Bank of India (RBI) use monetary policy tools like interest rates and reserve requirements to manage inflation.
Consumer Price Index (CPI):
- Primary Measure: India primarily uses the Consumer Price Index (CPI) to measure inflation. This represents the change in prices of a basket of goods and services that a typical household consumes.
- Benefits: CPI reflects the inflation experienced by consumers, making it relevant for policy decisions impacting household budgets.
- Drawbacks: CPI data often has a publication lag, meaning it might not reflect the most recent price changes.
Wholesale Price Index (WPI):
- Secondary Measure: While CPI is the primary measure, India also tracks the Wholesale Price Index (WPI).
- Focus: WPI measures the price changes of goods at the wholesale level.
- Composition: The WPI basket includes primary articles (agricultural products), fuel and power, and manufactured products.
- Benefits: WPI data is typically published more frequently than CPI, providing a more timely picture of price movements.
- Limitations: WPI may not directly reflect the inflation experienced by consumers, as it focuses on wholesale prices.
Key Points:
- India uses both CPI and WPI to measure inflation, with CPI being the primary indicator for policy decisions.
- CPI data can have a lag, while WPI data is published more frequently.