What is ‘Inflation’ | Meaning of Inflation
Inflation is the percentage change in the value of the Wholesale Price Index (WPI) from year to year. It effectively measures the change in prices of a basket of goods and services over a year. In India, inflation is calculated on the basis of the WPI. What Are Cause of Inflation and Rate of Inflation in India.
Formula for calculating Inflation=
(WPI in month of current year-WPI in same month of previous year)
————————————————————————————– X 100
WPI in same month of previous year
Inflation occurs due to an imbalance between the demand and supply of money, changes in the costs of production and distribution, or increases in product taxes. When the economy undergoes inflation, that is, when the price level of goods and services increases, the value of the currency decreases. This means that each unit of currency buys fewer goods and services.
It has its worst impact on consumers. High prices for everyday goods make it difficult for consumers to afford even the basics of life. This leaves them no choice but to ask for a higher income. Therefore, the government tries to keep inflation in under control.
Contrary to its negative effects, a moderate level of inflation characterizes a good economy. An inflation rate of 2 or 3% is beneficial to an economy as it encourages people to buy more and borrow more, because in times of lower inflation, the level of interest rates also remains low. Therefore, both the government and the central bank always strive to achieve a limited level of inflation.
What Are Cause of Inflation | Rate of Inflation in India
What Are Cause of Inflation
Here is What Are Cause of Inflation:
- Deficit Financing of Government Spending
- Population Growth
- Exports
- Primary Causes
- Tax Reduction
- Increase in Public Spending
- The imposition of Indirect Taxes
- Trade Unions
- Hoarding
- Price-rise in the International Markets
- Genuine Shortage
- Increased Velocity of Circulation
Deficit Financing of Government Spending
There are times when the spending of Government increases beyond what taxation can finance. Therefore, in order to incur the extra expenditure, the Government resorts to deficit financing. For example, it prints more money and spends it. This, in turn, adds to inflationary pressure.
Population Growth
As the population grows, it increases the total demand in the market. Further, excessive demand creates inflation.
Exports
In an economy, the total production must fulfill the domestic as well as foreign demand. If it fails to meet these demands, then exports create inflation in the domestic economy.
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Primary Causes
In an economy, when the demand for a commodity exceeds its supply, then the excess demand pushes the price up. On the other hand, when the factor prices increase, the cost of production rises too. This leads to an increase in the price level as well.
Tax Reduction
While taxes are known to increase with time, sometimes, Governments reduce taxes to gain popularity among people. The people are happy because they have more money in their hands. However, if the rate of production does not increase with a corresponding rate, then the excess cash in hand leads to inflation.
Increase in Public Spending
In any modern economy, Government spending is an important element of the total spending. It is also an important determinant of aggregate demand. Usually, in lesser developed economies, the Govt. spending increases which invariably creates inflationary pressure on the economy.
The imposition of Indirect Taxes
Taxes are the primary source of revenue for a Government. Sometimes, Governments impose indirect taxes like excise duty, VAT, etc. on businesses. As these indirect taxes increase the total cost for the manufacturers and/or sellers, they increase the price of the product to have a minimal impact on their profits.
Trade Unions
Trade union work in favor of the employees. As the prices increase, these unions demand an increase in wages for workers. This invariably increases the cost of production and leads to a further increase in prices.
Hoarding
Hoarders are people or entities who stockpile commodities and do not release them to the market. Therefore, there is an artificially created demand excess in the economy. This also leads to inflation.
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Price-rise in the International Markets
Some products require to import commodities or factors of production from the international markets like the United States. If these markets raise prices of these commodities or factors of production, then the overall production cost in India increases too. This leads to inflation in the domestic market.
Genuine Shortage
It is possible that at certain times, the factors of production are short in supply. This affects production. Therefore, supply is less than the demand, leading to an increase in prices and inflation.
Increased Velocity of Circulation
In an economy, the total use of money = the money supply by the Government x the velocity of circulation of money. When an economy is going through a booming phase, people tend to spend money at a faster rate increasing the velocity of circulation of money.
Rate of Inflation in India 2022
India’s annual inflation rate fell to 7.04% in May 2022 from an 8-year high of 7.79% in the previous month and below market expectations of 7.1%. However, it remained above the RBI target range of 2% -6% for the fifth consecutive month. Food prices increased by 7.84%, in particular vegetables (18.26%), oils and fats (13.26%) and spices (9.93%). Further upward pressure came from transport and communication costs (9.54 per cent); clothing (8.53%) and health (5.49%). On a monthly basis, consumer prices rose 0.94%, after rising 1.43% in April.
