National Inflation and the Local Price Level

8/14/2019 National Inflation and the Local Price Level

1/16

National Inflation and theLocal Price Level: A

Paradox

Sreeram A

V


2/16

An Introduction about

Inflation Inflation is one of the most periodichappenings, which very rarely capturedthe minds of the people and the mediain the past.

Combating inflations is one of themost challenging ventures that acountry can think of.

Consistent rise in the price, relativelyfor a longer period is termed asinflation.


3/16

Objective of the Paradox It explains about the gaining

tremendous public attention as well asmedia coverage to its full extent. This study analyses the possibility that

the local price level depends on severalother factors independent of nationalfactors. To justify this various countries suchas Brazil, USA, etc. and states insideIndia were checked with theirrespective Inflation rates.


4/16

Inflation: The World Over The USA and France faced the problem ofinflation at the end of the 17th century dueto the war of independence. Alaska and South Africa touched alarmingrates in 1848 due to discovery of gold

mines in Australia. Study conducted by Matteo and Benoit(2005) of European Central Bank andFederal Reserve Bank of Chicago revealed

that inflation has largely been a globalphenomenon over the last 45 years.The study was confined to 22 countries ofOrganization for Economic Cooperation andDevelopment(OECD).


5/16

Exploring the studyThe study contradicts the definition,Inflation is an international

phenomenon for the running inflationin India. The research focuses to test whether

the national rate of inflationaccompany the local level pricechanges.

No concrete studies have beenconducted specifically through findingcorrelation between the nationalinflation and the local price levels.


6/16

fl i d


7/16

Inflation andUnemployment

Another study conducted byAleksander Berentsen (2008) studied avulnerable issue in macroeconomics:the relation between unemployment

and monetary variables like inflation ornominal interest rates.The results suggests that monetary

factors may be important for labormarket outcomes not only theoreticallybut also quantitatively.

S l S d


8/16

Sample, Scope andLimitationsCommodities are classified in to five

major categories.oFish ItemsoVegetablesoGroceriesoFMCGsoFruit items

The study has been confined to

Mangalore City in Karnataka stateconsidering the limitation that pricerise is a continuos phenomenon.

Wh l l P i I d


9/16

Wholesale Price Index(WPI)

WPI is the index that is used tomeasure the change in the average

price level of goods traded in wholesalemarket.In India, a total of 435 commoditiesdata on price level is tracked through

WPI which is an indicator of movementin prices of commodities in all tradeand transactions.

It is also the price index which isavailable on a weekly basis with theshortest possible time lag only two

weeks. The Indian government has

C P i I d


10/16

Consumer Price Index(CPI)

CPI is a statistical time-series measureof a weighted average of prices of aspecified set of goods and services

purchased by consumers. It is a priceindex that tracks the prices of aspecified basket of consumer goods

and services, providing a measure ofinflation.CPI is a fixed quantity price index and

considered by some a cost of livingindex. Under CPI, an index is scaled sothat it is equal to 100 at a chosen pointin time, so that all other values of theindex are a percentage relative to this


11/16

To prove the differences betweenInflation and change in price level,inflation rate is calculated.

IfP0 is the current average pricelevel and P1 is the price level a

year ago, the rate of inflation during

the year might be measured asfollows:

Calculation of Inflation

rate:


12/16

The inflation rate were categorizedand the values are calculated asshown below:* Fish Items= 29.74* Vegetables = -5.48

* Groceries = 10.84* FMCGs = 2.00* Fruit items = 7.92

Inflation rate:


13/16

Correlation CoefficientFormula:

NXY - (X)(Y)Correlation(r) = ------------------------------------------

([NX2 - (X)2][NY2 - (Y)2])

whereN = Number of values or elementsX = First ScoreY = Second ScoreXY = Sum of the product of first and Second

ScoresX = Sum of First ScoresY = Sum of Second ScoresX2 = Sum of square First Scores

Y2

= Sum of square Second Scores


14/16

Interpretation The empirical result for thecorrelation coefficient is found to be

0.563 in Mangalore.This indicates that the nationalinflation rate and the local level

inflation can be correlated and they arepositive.The movement of national levelinflation is accompanied to the extent

of 56.30 % in the local level price.If the prices are increased ordecreased at the national level, thesame is accompanied to the extent of

half degree in the local level.


15/16

Conclusion

Inflation is misunderstood as achange in the price level in theentire country whereas the

changes will affect thecommodities which are included inthe basket of WPI and CPI.


16/16

Thank You

Documents

National Inflation and the Local Price Level