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Information about Inflation
Business & Mgmt

Published on February 25, 2014

Author: shritheja



Types of inflation

 Inflation: It`s a dynamic disequilibrium process. It means a steady Increase in the general price level over time due to demandpull & cost-push influences .  Demand–pull: Demand for an item has increased to a point where the price is increased to reach a new equilibrium on a supply demand diagram. ex: if there is a toy many children want for christmas, sellers may increase the price.

Cost -push: Price must be increased because the costs of making the product or service has increased. Ex: if there was a new tax on raw material A, any products which use this raw material will have their price increased relative to the tax increase. Inflation calculation :  Consumer Price Index (CPI).  Wholesale Price Index (WPI).

Consumer Price Index (CPI) The Consumer Price Index, or CPI, is defined as the monthly measurement of consumer item prices of just about everything you buy. The Bureau of Labor Statistics (BLS) surveys the customer item price changes in the retail prices of approximately 80,000 specific goods and services, called the market basket. cal : C P I = updated cost × 100 base period cost

FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks) HOUSING (rent of residence, bedroom furniture) APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services) RECREATION (televisions, toys, pets and pet products, sports equipment) EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories) OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Wholesale Price Index (WPI) WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.  It is also the price index which is available on a weekly basis .

 The Consumer Price Index is not viable to be used in India because there is too much of a lag in reporting the Consumer Price Index numbers.  Another debate points that contradicts the application of Consumer Price Index is the fact that it is calculated on a monthly basis while the Wholesale Price Index is calculated on a weekly basis

Current inflation rate : Reserve Bank of India says that the inflation is expected to come down from this fiscal’s fourth quarter, starting from January. Current rate 7.50 percent.

Indian inflation history :

Why is rupee losing its value against US dollar? Stock markets performance Indian stock exchanges are highly depended and dominated by foreign investors. When the economy is doing well and stock markets are in better conditions than other countries’ bourses, foreign investors will be more eager to invest here than anywhere else but if they are pulling the money out from Indian markets, they are selling rupees that results in rupee’s fall in value. Inflation Another reason is inflation, which is very high in India now. High inflation causes decrease in the purchasing power against other currencies. This also results in Indian currency decrease.

Current account deficit Current account deficit happened when a country’s total import is higher than the total exports. This makes the country, a net debtor to the rest of the world. A high deficit indicates that country is spending more money outside than it’s earning inside. Country’s affairs Last year, there were lots of corruption issues more and more VIPs are going to prison daily. The Anna Hazare’s campaign against corruption took the attention of the global media, which affected negatively foreign investors’ sentiments.

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