Inflation CPI WPI by scoobsehgal


									Let us start with the basic meaning of Inflation. To anyone who is new to this word it is 'Price Rise'.
Now, what is this 'Price Rise'??
Suppose today, we buy Mangoes for Rs. 20 per Kg but after 2 Days the rate shoots up to Rs.30 per Kg.
The same quantity of mangoes requires more money to buy after 2 days.
From this we figure out that Price Rise is the Reduction of buying power of money.
This is the core point of inflation.
The Mango example is a very small one. Inflation is a national, rather global issue and is affecting our
everyday lives.
The price of most of the things we buy today, to survive, is rising drastically. But the problem is not this
rise; the problem is that our incomes are not rising with the same rate.

Now let us explore what could be the reasons of Price rise with our earlier example.
Let us suppose that the production of mangoes fell due to unseasonal rains. So the supply of Mangoes is
affected. But the rains did not affect our demands. So suddenly we have a situation where demand is
more than the supply. By any means we cannot increase supply, and everyone is willing to buy. This
leads to Price Rise. As we see, with increased prices now less people would be willing to buy and thus
the demand meets the supply.

This also gives extra profit to the seller. This kind of Inflation is known as DEMAND-PULL INFALTION.
The other reason could be the increase in the input costs of the mongo farming, i.e the increase in cost
of fertilizers, seeds etc. To maintain their profits the farmers have to increase the cost of mangoes, thus
price rise. This is COST-PUSH INFLATION.

So now we define inflation as, a sustained increase in the general level of prices for goods and services.
It is measured as an annual percentage increase.
we have already discussed the causes of inflation so let’s look at its effects.
On a collective view you may see Inflation as an evil, but it affects different people in a different way. It
also depends upon whether inflation is anticipated or unanticipated. If the inflation rate corresponds to
what the majority of people are expecting (anticipated inflation), then we can compensate and the cost
isn't high.

Problems arise when there is unanticipated inflation:
    Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For those
       who borrow, this is similar to getting an interest-free loan.
    Uncertainty about what will happen next makes corporations and consumers less likely to
       spend. This hurts economic output in the long run.
    People living off a fixed-income, such as retirees, see a decline in their purchasing power and,
       consequently, their standard of living.
    Benefits to Farmers and loses to consumers.

We considered the example of mangoes, in which the rate of increase is easy to calculate.
But from a country point of view there are numerous commodities and services, on which the inflation
has to be calculated.
To solve this problem a basket is created, in this basket we put certain commodities and services and
observe their inflation rates over time and calculate the total inflation according to the weight-age given
to these commodities and services. This Measure is Price index.
Different countries use different price indexes to measure its Inflation rates.
Most common of these indexes are CPI and WPI.

CPI (Consumer Price Index)
CPI is a statistical measure of a weighted average of prices of a specified set of goods and services
purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer
goods and services, providing a measure of inflation.
Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values
of the index are a percentage relative to this one.
Most of the major economies like US, UK, Japan, France, Singapore, and China have selected CPI as its
official barometer to weigh its inflation.

WPI (Whole-sale Price Index)
In this method, a set of some commodities and their price changes are used for the calculation. WPI is
calculated on a base year and WPI for the base year is assumed to be 100. The data of wholesale prices
of all these commodities in the base year and the time for which WPI is to be calculated is gathered.
Then the WPI of a certain commodity is calculated. The overall Wholesale Price Index is the weighted
average of individual WPI figures. Commodities are given weight-age depending upon its influence in the
India is amongst the few countries of the world, which selected WPI as its official scale to measure the
inflation in the economy.

                        WPI                                                      CPI
Measure of temporal price change of wholesale           Measures the average price of consumer goods
transactions of all commodities in the country.         and services purchased by households.

The weights of items have been assigned in              Weights are assigned in proportion to their share
proportion to their share in total value of             in the consumption expenditure of family of
transaction (output) in the economy.                    industrial workers in the selected centers.

Measures Inflation at each stage of production.         Measures Inflation only at the final stage of

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