Inflation – Definition, Causes, Effects, Calculation

Inflation is the rise of prices of daily usable goods such as food, clothing, fuel, transport, etc. Inflation increases the cost of living. It can also be considered as the change in the average price of services and commodities at regular intervals. It indicates the losing value of purchasing power of a unit of a nation’s currency as the services and products get more expensive.

• In general, inflation is the difference between the demand and supply of a good or service. When aggregate demand exceeds aggregate supply an increase in price level takes place.

• Although high levels of inflation are unwanted, a certain level of inflation is required in the economy to ensure that expenditure is promoted and money hoarding through savings is discouraged.

How is Inflation Measured?

There are two indices to measure the increase and decrease of price levels −

• the Wholesale Price Index (WPI), and

• the Consumer Price Index (CPI).

These indices measure the price levels in wholesale and retail price levels.

• CPI tracks the change in price levels of goods consumes by households. In other words, it covers the price levels at the consumer level.

• WPI, on the other hand, tracks the increase or decrease in price levels of commodities at a higher level. It considers the pricing at the corporate levels and not at a retail level of sales. WPI aims to monitor the price levels that show demand and supply in manufacturing, construction, and industry.

The Ministry of Statistics and Programme Implementation, a central government authority measures inflation in India.

Effects of Inflation

The purchasing power of an economy’s currency loses its value as the goods and commodities get dearer. This impacts the cost of living which leads to loss of acceleration of economic growth.

• However, a little growth in inflation is required to maintain the required expenditure and stop money hoarding.

• When money loses its value, people need to invest the money, and investing results in the economic growth of a country.

The Main Causes of Inflation

The reasons for inflation have been a subject of considerable debate in India. The chief reasons for inflation can be −

• High demand and low production of a good or commodity.

• Excess circulation of money.

• Too much money in possession leads to higher spending that leads to inflation.

• An increase in product prices may impact the final price leading to inflation.

• An increase in the price of goods may lead to high labor/wages for maintenance od cost of living leading to further inflation.

Inflation is not bad for everyone

The effects of inflation can be good or bad depending on the kind of goods they possess. For people having real estate or commodities, a little inflation can be good, while for those having cash, it may be harmful because inflation erodes the value of money.