All About Inflation

This is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Another definition of inflation is that it is an upward movement in the average level of prices. Its opposite is deflation, a similar movement in the opposite direction. The boundary between inflation and deflation is price stability. Because inflation is a rise in the level of prices, it is intrinsically linked to money, which may explain the frequently quoted, “Inflation is too many rupees chasing too few goods.
What is WPI?
The wholesale price index (WPI) is the most widely used price index in India. It is the only general index aimed at capturing week-to-week price behavior of commodities flowing into the wholesale trade. WPI tracks price movements in 435 items, and it attaches a value of 22.02 % for primary articles, 14.23 % for fuel, power, light and lubricants, and a dominant 63.75 % for manufactured products. The index is generally taken as the indicator of the rate of inflation in the economy. The government and the RBI formulate their fiscal and monetary policies on that basis.
What is CPI?
Unlike in many other countries, India does not have a single consumer price index (CPI), which can then be used to measure inflation (more accurately, many say, than the WPI). What we have are four indices that measure the price behavior of commodities as relevant to four specific segments of population. Of the four, the CPI for industrial workers (CPI-IW) is the most used indicator to determine the price situation facing common people. This is also used to determine the dearness allowance of employees in both public and private sectors.
As their names suggest, the CPI pertains to a set of items that a consumer consumes while the WPI is a basket particular to the wholesale market. Therefore, if the inflation for a particular week is, say, 10 per cent, it means the index is 10 per cent higher than it was the same week the previous year. Then there is core-inflation, which means the inflation rate without taking into account food and fuel. Some say both need to be taken out because of their volatility, while some argue that both items cannot be taken out because a consumer does pay for the rise in their prices.
The index always has a base year. If a particular item has a higher weight and its price rises, it will have a greater effect on the inflation rate. At the end of the day it depends on how much weight a particular item is assigned. Most countries use a consumer price index (CPI) while India has a wholesale price index (WPI).
Inflation is always caused because of too much money in the system. In other words, inflation in a country is always caused because the supply of money is much greater than the demand for it.
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