K J SOMAIYA COMPREHENSIVE

COLLEGE OF EDUCATION, TRAINING &RESEARCH

TOPIC : Inflation Trends & Its Effects.

B.ED 2010 - 2011

By Silvia FernandesSub- Economics

Roll No - 15STD – 1X

INFLATION

Definition of Inflation. Whole Price Index. Consumer Price Index. Trends in Inflation. Impact of Inflation. Effects of Inflation.

CONTENT

Inflation is defined as a sustained increase in the general price level of goods and services.As inflation rises, the value of currency goes down. Thus the purchasing power of the currency i.e. the good & services that can

be bought in a unit of currency too goes

down.

What is Inflation?

How is inflation measured?

WPI ( wholesale Price Index ). India – the only major country uses (1st published in 1902).

What is WPI? The WPI number is a weekly measure of wholesale price movement for the economy.

Indian Government constructed its present WPI way back in 1993-94 (1993-94 series replacing 1981-82 bases) by making a basket of 435 commodities.

The 100 point index is subdivided into three groups.

WPI Indian Example

1. Primary Articles (98 items) – 22.02%. Food articles, non-food articles, minerals.

2. Fuel, Power, Light and Lubricants (19 items) – 14.23%.

3. Manufactured Products (318 items)-63.75%. Food products Beverages, tobacco & tobacco products Textiles……..etc.

Major Groups

Mar’ 10 Apr’ 10 Mar’ 10 Apr’10

Primary Articles

283.2 289.7 14.1 13.88

Of which

Food Articles

284.4 292.4 16.65 16.8

Non-food Articles

254.4 256.1 12.77 10.5

Fuel Products

361.8 364.0 12.71 12.55

Manufacturing Products

214.9 216.6 7.13 6.70

WPI Inflation 250.8 253.7 9.9 9.59

WPI Monthly Inflation(Rate of inflation Y-Y in %)

A measure of the average price of consumer goods and services purchased by

households. ( 1st published in 1970 ). CPI indicates the change in purchasing

power of the consumer. CPI for Industrial workers (CPI-IW) CPI for Agricultural Labourers/rural labourers

(CPI-AL/RL) CPI for urban Non-Manual Employees (CPI-

UNME) Published on monthly basis.

Consumer Price Index (CPI)

India uses the WPI to calculate the inflation rate.

Most developed countries use the CPI to calculate inflation as this actually means the increase in price that a consumer will ultimately have to pay for.

Presently 145 countries practice CPI compared to 27 practicing WPI.

Measure of Inflation

The current CPI is 218.71

Unanticipated inflation is bad because it makes the economy behave like a giant casino.

Gains & losses Value of money Resources

Unanticipated inflation leads to :

Redistribution of income, borrower & lender Too much or too little lending or borrowing.

Why is Inflation bad?

Redistribution of income and wealth among different groups.

Distortion in relative prices and outputs of different goods, or sometimes in output & employment for the economy as a whole.

The Economic Impacts of Inflation

2006-2007 2007-2008

Inflation 7.8 12.0

Food Inflation 10.3 17.6

Non-food Inflation 6.2 6.8

INFLATION RATES

Inefficient market. Hoarding of Commodities Discourages investment & saving Higher income tax rates. Increase imports and reduced exports. Examples : Increase in the price of wheat,rice,sugar, CNG etc.

Effects of Inflation

1) What do you mean by Inflation?2) How is Inflation calculated?3) What do you mean by CPI?4) How does India calculate the Inflation

rate?5) What do you mean by WPI?6) What are the effects of Inflation?

Evaluation

1. Inflation is general increase in price of goods and services.

2. Inflation measured by WPI and CPI.3. It is the average price of consumer goods

and services purchased by households.4. India uses the WPI to calculate the

inflation rate.5. It is the weekly measure of wholesale

price movement for the economy.6. Its effects are inefficient market, hoarding

of Commodities, discourages investment & saving, higher income tax rates, increase imports and reduced exports.

ANSWERS