Moody’s

Inflation

Representational image

Inflation numbers ease, leave room for RBI rate cut

India's annual wholesale inflation eases at (-)0.91% in February

Falling food prices seen easing retail inflation in Feb

A girl points out a dress at a roadside shop selling clothes at a market in Mumbai

Jayant Sinha

<div>
	Inflation can be defined as a persistent rise in the general price of goods and services of common or daily use &mdash; such as clothing, food, fuel, transport, etc &mdash; which results in an increase in the cost of living.</div>
<div>
	&nbsp;</div>
<div>
	Inflation is the measure of change in average price of services and commodities, done at regular intervals. It indicates a decrease in the purchasing power of a unit of a nation&rsquo;s currency as the products and services get more expensive. Basically, inflation is the difference between aggregate demand and aggregate supply of goods and services. When aggregate demand exceeds the supply of goods at current prices, there is a rise in the price level.</div>
<div>
	&nbsp;</div>
<div>
	A certain level of inflation is required in the economy to ensure that expenditure is promoted and money hoarding through savings is discouraged.</div>
<div>
	&nbsp;</div>
<div>
	<strong>How is inflation measured?</strong></div>
<div>
	&nbsp;</div>
<div>
	In India, there are two main sets of inflation indices to measure changes in price levels &mdash; Consumer Price Index (CPI) and Wholesale Price Index (WPI). These indices measure changes at the retail and wholesale price levels, respectively. CPI tracks any shift in retail prices of essential and daily goods and services consumed by households across the country. In short, it captures changes in price level at the consumer level.</div>
<div>
	&nbsp;</div>
<div>
	WPI, on the other hand, is the average change in the price of commodities at the wholesale level. It considers the price of goods traded among corporations, not goods purchased by consumers. The aim of WPI is to monitor price drifts that reflect demand and supply in manufacturing, industry and construction.&nbsp;</div>
<div>
	&nbsp;</div>

RELATED BUDGET TERMS

Learn what is Inflation, Inflation News, Definition and more here at Business Standard.

What is Inflation, Inflation News, Budget 2020 News, Types of Inflation

What is Inflation

<div>
	When we talk about the rate of inflation, it often refers to the rate of inflation based on the consumer price index (CPI). The CPI tracks the change in retail prices of goods and services which households purchase for their daily consumption.</div>
<div>
	&nbsp;</div>
<div>
	To measure inflation, we estimate how much CPI has increased in terms of percentage change over the same period the previous year. If prices have fallen, it is known as deflation (negative inflation). The Central Bank (RBI) pays very close attention to this figure in its role of maintaining price stability in the economy.</div>
<div>
	&nbsp;</div>
<div>
	The CPI monitors retail prices at a certain level for a particular commodity; price movement of goods and services at rural, urban and all-India levels. The change in the price index over a period of time is referred to as CPI-based inflation, or retail inflation.</div>
<div>
	&nbsp;</div>
<div>
	Generally, CPI is used as a macroeconomic indicator of inflation, as a tool by the central bank and government for inflation targeting and for inspecting price stability, and as deflator in the national accounts.</div>
<div>
	&nbsp;</div>
<div>
	CPI also helps understand the real value of salaries, wages, and pensions, the purchasing power of the nation&rsquo;s currency, and regulating rates. CPI, one of the most important statistics to ascertain economic health, is generally based on the weighted average of the prices of commodities. It basically gives an idea of the cost of the standard of living.</div>
<div>
	&nbsp;</div>
<div>
	Simply put, CPI specifically identifies periods of deflation or inflation for consumers in their day-to-day living expenses. If there is inflation (when goods and services cost more) the CPI will rise over a period of time. If the CPI drops, that means there is deflation, or a steady reduction in the prices of goods and services.</div>
<div>
	&nbsp;</div>
<div>
	<strong>How is CPI calculated (CPI formula)?</strong></div>
<div>
	&nbsp;</div>
<div>
	To calculate CPI, multiply 100 to the fraction of the cost price of the current period and the base period.</div>
<div>
	&nbsp;</div>
<div>
	<strong>CPI formula: </strong>(Price of basket in current period / Price of basket in base period) x 100</div>
<div>
	&nbsp;</div>

Learn what is CPI-based inflation, Retail Inflation Definition, Retail Inflation News and more here at Business Standard.

What is CPI-based inflation, Retail Inflation Definition, Retail Inflation News

CPI-based Inflation

<div>
	The Wholesale Price Index (WPI) reflects changes in the average prices of goods at the wholesale level &mdash; that is, commodities sold in bulk and traded between businesses or entities rather than goods bought by consumers. There are certain limitations in using WPI as a measure for inflation, as WPI does not consider the price of services, and it does not reflect the consumer price situation in the country.</div>
<div>
	&nbsp;</div>
<div>
	WPI is released by the Economic Advisor in the Ministry of Commerce and Industry. The purpose of WPI is to inspect movement in prices of goods that reflect supply and demand in industry, construction and manufacturing. The index basket of WPI categorises commodities under three groups &mdash; primary articles, fuel and power &amp; manufactured products.</div>
<div>
	&nbsp;</div>
<div>
	In April 2017, the government revised the base year for WPI from 2004-05 to 2011-12. WPI is extensively used for short-term policy intervention as it is the only index that is available on a weekly basis.</div>
<div>
	&nbsp;</div>
<div>
	WPI also helps in measuring macroeconomic and microeconomic conditions of the economy. WPI provides estimates of inflation at the wholesale transaction level for the economy overall. It also helps in timely intervention by the government to monitor inflation before the price hike spills over to retail prices.</div>
<div>
	&nbsp;</div>
<div>
	The WPI-based inflation is used by the government in preparation of fiscal, trade, and other economic policies. Business organisations, policymakers, accountants, and statisticians use WPI as an indexing tool to formulate price adjustment clauses. Rise in WPI indicates inflationary pressure in the economy, and vice versa. The extent of rise in WPI is used to measure the level of wholesale inflation in the economy.</div>
<div>
	&nbsp;</div>

Learn what is WPI-based inflation, WPI-based inflation Definition, WPI-based inflation News and more here at Business Standard.

Page 52 - Latest Updates on Inflation

Inflation could rise on bad monsoon, currency decline: Moody's

Retail Inflation seen at 5% in March; RBI to cut rates by 25%: Report

Inflation numbers ease, leave room for RBI rate cut

India's annual wholesale inflation eases at (-)0.91% in February

Falling food prices seen easing retail inflation in Feb

India's inflation seen cooling in February, gives RBI easing room

NDA govt has managed to markedly reduce inflation, says Jayant Sinha