Inflation generally means rise in prices. Inflation is an increase in the price of a basket of goods and services that is representative ofthe economy as a whole. It is a persistence and substantial rise in general level of prices after full employment level of outputHow India calculates Inflation? There are 2 methods: Wholesale Price Index (WPI) and Consumer Price Index (CPI) Wholesale Price Index: WPI is the index that is used to measure 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 ofcommodities in all trade and transactions. Consumer Price Index (CPI): CPI is a statistical time-series measure of weighted average of prices of a specific set of goods & services purchased by consumers India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.Types of InflationOn the Basis of Rate of Inflation: Creeping Inflation: Rise in the price level at very low rate, or snails pace, around 2-3% perannum is referred to as Creeping Inflation orMild Inflation. Walking Inflation: A sustained price increase from 3 to 7 or below 10% is termed as Walking Inflation. Running Inflation: A sustained price rise A sustained price rise from 10 to 20% per annum is known as Running Inflation Hyperinflation: Running Inflation if not controlled turns into Hyperinflation which is known as Galloping or Jumping

On the Basis of degree of control: Open Inflation: Continuous rise in price without any interruption and control from the government or any other authority is known as open inflation Suppressed inflation: When price level in economy is not allowed to rise (though conditions exist for rise) through the use of government policies like price controls and rationing, it is known as suppressed inflation

On the Basis of causes of Inflation: Demand pull Inflation: The Inflation caused due to demand pressures is known as Demand pull InflationCauses: Increase in quantity of money, Increase in Business outlays or government expenditure, Foreign expenditure on goods and services Cost push Inflation: Increase in the overall price level due to cost pressures is known as cost-push or supply side inflation.Causes: Higher wage rates, Higher profit margins, Higher taxes, Higher prices of outputGeneral causes of InflationMonetary factors:- Expansion of money supply Expansion of Bank credit Deficit financing Increase in disposable income Increase in indirect taxes Drop in exchange rateNon-monetary factors:- Rising population Natural calamities Speculation and Black money Unfair practices by monoply houses Poor performance of the farm sector Bottlenecks and shortages such as Infrastructure, capital and Foreign exchange

Effects of inflation On business community: Profit rises because of rising prices Farmers usually gain during inflation, because they can get better prices for their harvest during inflation Investor- Fixed income recipient will be hurt : Those who invest in debentures and fixed-interest bearing securities, bonds, etc, lose during inflation. However, investors in equities benefit because more dividend is yielded on account of high profit made by joint-stock companies during inflation Lower production Banks increase Interest rates Unemployment Trade unions to demand higher wages Higher uncertainty Lower consumption -Fixed income recipient will be hurt : Since wages do not rise at the same rate and at the same time as the general price level, the cost of living index rises, and the real income of the wage earner decreases. Lower national saving: Inflation will lead to deterioration of gross domestic savings and less capital formation in the economy and less long term economic growth rate of the economy Winners? Not everyone loses with low and moderate rates of inflation. People whose income is flexible - If their incomes rise as well, they are double winners. Borrowers (debtors) - Borrowers win because the real value of their loan repayments decreases at the same rate as inflation rises. Balance of trade as Imports will increase than exports and so the economy will have a deficit There are two problems generated by inflation: uneveness and uncertaintyUneveness: Inflation produces uneven increases in the prices of products. In periods of inflation it is possible of have some products decrease in price, others increase slowly, while others increase quickly. This means that some consumers are hurt worse than others. Buyers of gasoline are hit worse than buyers of DVDs and computers .People with fixed incomes will see their income fall at the same rate as inflation rises. Some savers will see their savings fall almost as fast as the rate that inflation Uncertainty: Who else is hurt by the uncertainty? Lenders banks, etc. Lenders lend money to earn a profit. To earn a profit, the interest they charge must cover all costs, and be higher than the rate of inflation. When lenders lend money, they have an expected rate of inflation at the time of the loan. This expected rate of inflation is based on current rate of inflation, plus a guess about the future. If lenders guess right about inflation, they earn a profit. If lenders guess wrong, they lose money. 1. Nominal interest rate = the observed interest rate1. Real interest rate = nominal interest rate rate of inflation 1. Lenders try to set the nominal interest rate to: 1) Cover costs, 2) Match expected rate of inflation and 3) Yield a profit Why inflation is a cause of concern? They create inefficiency in the markets & firms cannot plan from long term perspective It discourages saving and investment Instability in currency exchange price Higher income tax rates Imports will increase than exports and so the economy will have a deficit Currency debasement (which lowers the value of a currency, and sometimes cause a new currency to be born) Rising prices of imports (if the currency is debased, then its purchasing power in the international market is lower). How to control inflation? Two ways: Monetary measures and Fiscal measuresMonetary measuresA- Quantitative Methods SLR/CRR Interest rates/bank rate OMO(open market operations) Margin Money Repo RateB- Qualitative Methods- Moral suasion Rationing Direct actionFiscal measures Taxation-direct and indirect Government expenditure Public borrowings The government can also take some protectionist measures (such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.).

India Inflation Rate

The inflation rate in India was last reported at 6.5 percent in December of 2011 From 1969 until 2010, the average inflation rate in India was 7.99 percent