FAQs: Everything you want to know about inflation

What is inflation?

Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole.

How is inflation calculated?

The Wholesale Price Index (WPI) is used to calculate and then decide the inflation rate in the economy.

What short-term measures does the Govt take to tackle inflation?

Usually, the Government scraps import duties on products like edible oils. In the ongoing inflation crisis, the Govt also banned exports of essential goods in order to arrest rising prices. The government also takes steps to bring down prices of capital goods.

What does RBI do to cut inflation?

The Reserve Bank Of India, the country's Central Bank, takes monetary measures like a hike in interest rate or tightening money supply through a hike in CRR (Cash Rserve Ratio) to check inflation.

What are the effects of inflation?

The most harmful effect of inflation is that it hampers economic growth. Inflation reduces the real value of money capital overtime. It reduces the will to save and invest. Hence, it arrests the economic progress of the society.

How does it affect the common man?

Inflation affects different groups of people unequally. While the big producers and the businessmen can gain a lot from inflation, the common people particularly the fixed income earners suffer enormously due to the high prices of essential goods and products.

Common measures of inflation

The Wholesale Price Index (WPI) and the Consumer Price Index (CPI) or Cost of Living Index.

What is 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. However in India, a total of 435 commodities data on price level is tracked through WPI.

What is CPI?

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

What is demand-pull inflation?

This is basically when the aggregate demand in an economy exceeds the aggregate supply. It is also defined as `too much money chasing too few goods'.

What is cost-push inflation?

This is caused when there is a supply shock. The best example to describe cost-push inflation is the oil shock in the 1970s. When OPEC was formed, it squeezed the supply of oil and this caused oil prices to rise, contributing to higher inflation.

(With inputs from agencies)