This article is a part of series from Economics. In this article we will be talking about basic definitions and concepts used in Inflation. We will also talk about how it works and its effects on the economics of the nation.
This is the rate of increase in general level prices of goods and services over a period of time. (So simple).
For example if cost of onions or college fees increases, its inflation. We will talk about why and how it happens and how it effects us in later sections.
Other related concepts to inflation are
For understanding this you need to understand the demand and supply relation.
Example : Assume if there are only 10 potatoes today in market and 10 people are there to buy it and every one buys one potato at ₹10/potato. Here the supply is 10 and demand is also 10.
Now if tomorrow, we have 10 potatoes but if 50 people are there to buy them in the market. In this case what should happen? People who really want to buy it will offer a higher price suppose ₹15/potato, and they will win because sellers will sell them because they are getting higher price. So the concept here is:
Now types of causes :
Inflation is measure through various standard price indices. The major ones that has larger base are CPI (Consumer Price Index) and WPI (Wholesale price index). While CPI deals with the prices that consumer pays for his daily needs, WPI deals with the prices in which the wholesale market plays. The current prices are compared to the price level in certain past year called Base year, to get the inflation.
Consumer Price Index (CPI) : It is the weighted average of price of commodities (goods and services) used by consumers. The commodities used under this index are fixed and called Consumption basket. The weight given to each commodity if defined in proportion to its importance and frequency of use by consumers. CPI is calculated every month and is different for different regions.
List of commodities in order or their weight : Food > Fuel > Beverages > Clothes > Electronics > Vehicles
There are three varieties of CPI based on type of consumers :
Wholesale Price Index (WPI) : It is the weighted average of commodities dealt in the wholesale market. Services are not included in this as services are served directly to consumers. WPI is calculated every week for the whole nation. As the prices of products are less in Wholesale market as compared to price paid by consumers, WPI is less than CPI and contains more goods than CPI's consumption basket.
Other Indices :
Producer's Price Index (PPI): It deals with prices for producers. Its like CPI for producers.
NHB RESIDEX : It is prices in housing industry and is calculated by Nation Housing Bank (NHB).
Other Concepts Related to inflation :
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