Group Members
Rite Ri tesh sh Ra Ranp npis ise e
Chand Ch andan an Ja Jais iswa wall
Puni Pu nita ta Pan anch chal al
Stut St utii Mi Mitt ttal al
Prin Pr ince ce La Lath th
Shail Sha ilii Si Siro rohi hi
Kirtivardhan
Abhis Abh ishe hek k Roy
Shru Sh ruti ti Aj Ajey ey
Group Members
Rite Ri tesh sh Ra Ranp npis ise e
Chand Ch andan an Ja Jais iswa wall
Puni Pu nita ta Pan anch chal al
Stut St utii Mi Mitt ttal al
Prin Pr ince ce La Lath th
Shail Sha ilii Si Siro rohi hi
Kirtivardhan
Abhis Abh ishe hek k Roy
Shru Sh ruti ti Aj Ajey ey
LAT TION INFLA Definition:
Inflation can be defined as a rise in the general price level of goods and services and therefore a fall in the value of money. That means the purchasing power of you ourr money dec ecrreases es..
How
Inflation is Calculated?
There are two methods to calculate inflation 1. Wholesale Price Index (WPI) 2. Consumer Price Index (CPI)
1. 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 676 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.
Cont The 676 commodities are divided into different groups & sub groups. Each commodity has some weightage in the WPI index. Below are the weightages of commodities group wise: ITEMS
Weightage
Primary Articles
20.1%
Fuel & Power
14.9%
Manufactured Products
65%
Formula: WPI at end of year WPI at beginning of year X 100 WPI of beginning of year Example: WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st 1981 is 109.72 then inflation rate for the year 1981 is, = (109.72 106.09) x100 =3.42% 106.09 So the inflation rate for the year 1981 is 3.42%.
Recent Changes in WPI ITEMS
Base Year (OLD 1993-94)
Base Year (NEW 2004-05)
Primary Articles
22%
20.1%
Fuel & Power
14.2%
14.9%
Manufactured Products
63.7%
65%
Consumer Price Index (CPI) CPI
is a statistical time-series 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. Most developed countries (UK, US, JAPAN and CHINA) use the Consumer Price Index (CPI) to calculate inflation.
Difference between WPI and CPI Wholesale Price index (WPI) WPI is available on weekly basis.
Consumer Price Index (CPI) CPI
is available on a monthly basis.
WPI contains commodities which CPI contains set of goods are not even consumed by purchased and consumed by consumers. consumers. Example: Coarse grains that go into making of livestock feed. WPI is measured in terms of price increase for the producers and traders.
CPI
is measured in terms of price increase for the end consumer.
Choice of a Base Year In determining the base year for any index number, a set of well-known criteria is followed. These include: a) The base year should be a normal year, i.e., a stable year in respect of economic activities like production, trade, etc. b)
It should not suffer from business cycles;
c)
Availability of reliable price data for the selected year.
d)
The base year should be as recent a year as possible so that by the time revised series of items and their prices are released, it should not have outlived its utility.
WHY 2004-05 SELECTED AS NEW BASE YEAR?
The Annual Survey of Industries (ASI) data is the primary
source for the selection of the product basket and derivation of product level weights for the manufacturing group of the WPI series.
The availability of the latest ASI data for the year 2004-05 was one of the major factors for considering 2004-05 as the base year for the new WPI series.
The year 2004-05, being a relatively recent year, the task of collection of backlog price data from this year onwards was expected to be more manageable.
Furthermore, it was a normal year, free from any major economic upheaval.
Why India uses WPI?
Finance ministry officials point out that there are many problems while shifting from WPI to CPI model.
First of all, they say, in India, there are four different types of CPI indices and that makes switching over to the Index from WPI fairly risky and unwieldy.
The four CPI series are: 1.
CPI Industrial
Workers
2.
CPI Urban
3.
CPI
4.
CPI Rural labour
Non-Manual Employees
Agricultural laborers'
Cont..
Secondly, officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers.
The WPI is published on a weekly basis and the CPI, on a monthly basis.
And in India, inflation is calculated on a weekly basis.
Types of Inflation Demand - Pull Inflation Demand-pull
inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the macro economy - households, businesses, governments and foreign buyers.
Cost Push Inflation Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services curtail from an increase in the cost of production, we have cost-push inflation
Causes of Inflation There are various factors which cause inflation in the economy -
Monetary Factors
Expansion of Money Supply
Increase in Disposable Income
Increase in Indirect Taxes
Drop
in exchange Rate
Cont Non-monetary Factors
Rising Population
Natural Calamities
Speculation and Black Money
Unfair Practices by Monopoly Houses
Bottlenecks and Shortages
Cont Structural Factors
Capital
Shortage
Infrastructural Bottlenecks
Limited Efficient Entrepreneurs
Lack of Foreign Capital
Imperfections of the Market
Unemployment
Cont Global Factors
Increase in International Prices
Cold
Rise in Fuel Prices
War with other countries
Effects Of Inflation
Positive Effect
Benefit the cartels formed by the companies Benefit borrowers
Farmers Gain In Inflation
Tobin effect
Negative Effect
Hoarding
Increased risk - Higher uncertainties
Distortion
of relative prices
Fixed income recipients will be hurt
Lowers national saving
Rising prices of imports
Income diffusion effect
Illusions of making profits
Rising prices of imports
Existing creditors will be hurt
Currency
Causes business cycles
Causes
debasement
an increase in tax bracket
Measures to control Inflation The Various measures to control inflation are: 1.Monetary Measures 2.Fiscal Measures 3.Other Measures
Cont.. 1. Monetary measures The monetary measures which are widely used to control inflation are divided into
Bank rate policy
Statutory Liquidity Ratio
Open market operation
Repo rate
Cont
Reverse repo rate
Cash
Reserve Ratio
Key Rates
2009
April, 2010
Dec, 2010
CRR
5.75%
6%
6%
Repo rate
5%
5.25%
6.25%
Reverse Repo rate
3%
3.75%
5.25%
Cont
Selective credit controls
Moral suasion
Credit
authorization scheme
Fiscal Measures
Taxation
Government expenditure
Public borrowings
Protectionist measures
Other Measures
To Increase Production
Price Control
Rationing
Food Inflation
Food price inflation is one of the most critical economic problems in the country today.
Lower agricultural growth in India compared to the much faster GDP growth.
The high food price inflation is having a significant impact on the Indian consumer. The chart below gives the way the Indians spend.
Reasons for high Food Inflation
Low production and productivity
The prevailing market inefficiencies lack of coordinated efforts in public procurement
Poor distribution
Wastage due to inadequate and poor storage facilities
Inefficient public distribution system
Speculative trading
Increasing retail margins
Some Prescriptions
The release of food grain stocks together with faster distribution.
Part of Foreign Exchange Reserves can be used for bulk import of essential commodities.
Improving food production and productivity.
Promoting Private sector Participation in Food grain Management.
Stepping up investments
Foreign Direct Investment (FDI) in food retailing
Inflation Chart
