How inflation is calculated in India?
Inflation is an increase of average prices of goods and services. Inflation decreases the value of the currency. That means in India, the increasing inflation will depreciate the value of Rupee. Thus the purchasing power of the rupee decreases. For example, you are buying edible oil at Rs 100/kg. Please assume that the inflation is near 15%. If the inflation rate remains throughout the year, you have to pay an amount of Rs 115 for I kg edible oil in the next year. You can purchase only near 900 gram of edible oil by Rs 100. That means the value of money is decreasing with increasing inflation.
India and Inflation
India uses Whole Sale Price Index (WPI) for calculate inflation. It is calculated on the basis of price movements in the whole sale price of certain goods and services. Price level of 435 commodities are calculated to find inflation in India. 435 commodities are divided in to different groups and each of them will be given its own weightage. For example primary articles were given a weightage of about 22%*. Fuel, power, Light and Lubricants were given a weightage of about 14%*. Manufacturing products were given a weightage about 64%*.
The primary articles include the groups like food articles, non food articles and minerals. The manufactured products include food products, beverages, rubber, plastic products, basic metals, machinery, machine tools, paper, paper products, wood and wood products etc.
Another method for calculate inflation is the Consumer Price Index (CPI). Major developed countries are using CPI to calculate inflation. CPI is the measure of average goods and services purchased by the households. CPI is constructed by two basic types of data. They are price data and weighting data. Price data is collected from the sample retail outlets. Weighting data is collected by the study of expenditure. There are many opinions that India should switch to CPI, because major developed countries are using CPI. The CPI data will not come frequently. It is released once in a month. So the government of India is very reluctant to use CPI to calculate inflation.
Reasons for inflation
Inflation increases when there is too much money in the economy. That means too much money is concentrated in a few goods. High deficit financing is another reason for inflation. High population will result to increase in demand and increase inflation. Bank’s liberal attitude towards giving loans will increase inflation. Increase in the price of fuel due to any political, natural or economic reason will increase inflation.