What is Inflation?

“Inflation” in simple words is the progressive increase in the price of general goods and services, in the economy.

The purchasing power of money is the number of goods and services that can be bought with a monetary unit. Inflation further leads to a decrease in the purchasing power of money.

How? Here We Take An Example to Understand This:

Lets understand this with an example: Rs.100 was put away on a shelf, what would happen to the money after a year? Yes! It would be the same. But it would buy lesser goods and services than what it would have a year back as all goods and services would have become more expensive after a year.

It means that in comparison today to that of last year is a function of how expensive goods and services have become over the period.  Which in turn is a function of inducing inflation rate in the economy.

How to Measure Inflation?

Wholesale Price Index (WPI) and Consumer Price Index (CPI) are indexes used to calculate the inflation in the country.

In order to calculate inflation India uses the WPI index.

WPI is defined as the average change in prices of commodities at the wholesale level. It is used to measure prices of Goods only and usually measured at the first stage of the transaction. It is only used in few countries including India. Which is usually paid by manufacturers and sellers.

CPI is defined as the average change in the prices of commodities, at the retail level. It is used to measure prices of Goods and Services both. Measurement of  Inflation. It is usually measured at the final stage of the transaction. This is usually paid for by consumers. It is used by 157 countries.

Inflation Impact:

If the inflation rate is 3-5%. It is beneficial to the economy. If it is outside this range, it is harmful to the country’s manufacturing industry, further limiting employment and other opportunities.

Positive Effect:

It is considered that moderate inflation is usually good for economic growth.

Negative Impact:

Hyperinflation has reduced people’s real income, reduced savings and investment, further reduced exports, and negatively impacted the balance of payments. Therefore, the economy as a whole is adversely affected by hyperinflation.

On Society:

A class of society gets fixed income, these are pensioners, daily wage earners, salary receiving persons, etc. Inflation reduces the purchasing power of these people, which further reduces aggregate demand in the economy.

National Impact:

As per the RBI MPC meeting in Dec 2021, The repo rate remains unchanged at 4% while The reverse repo rate remains unchanged at 3.35%. The marginal standing facility (MSF) stands at 4.25%.

CPI-based inflation is retained at 5,3% for the financial year 2022 while the policy rate remains unchanged, The Inflation projection has been increased to 4.5% to 5.1% in Q3 and reduced from 5.8% to 5.7% in Q4 of 2021-2022

Global Impact:

Firstly, the Bank of England (BoE)  became the first major central bank to raise major interest rates on December 15 to combat inflation. The BoE’s key interest rate rose 0.15 percentage points to 0.25% percentage points.

Secondly, Their monetary policy-centric inflation target was 2%, and the UK CPI inflation in November was 5.1%. Levels are not the only ones that have implemented monetary policy measures.

The rise in inflation was strong. Between September and November, inflation rose by 2 percentage points.

BoE expects the inflation rate to be on the rise early next year and peak at around 6% in April 2022.

At last, The COVID-induced disruption of supply chains is responsible for the increased up costs. On the demand side, inflation is rising due to the fiscal stimulus measures introduced in the United States.

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