Discussion on Inflation

Education

Discussion on Inflation

Inflation

In simple language, inflation is the rate at which prices increase annually. Essentially, prices go up due to two factors:

a. Cost-push factors

Cost-push factor inflation occurs when there is an increase in the cost of production of an item, which then gets translated into a higher price for that item in the market.

b. Demand-pull factors

Demand-pull factor inflation occurs when there is more money with consumers compared to the total number of goods available in the market. With too much money chasing too few goods, prices rise because people are willing to pay more for the same item. This type of inflation usually arises when the demand exceeds supply.

On the other hand, when prices fall it is known as deflation. However, this is more of a theoretical concept as developing countries rarely experience deflation.

Inflation in India

A combination of both cost-push and demand-pull factors exist in India. However, cost-push factors are more apparent in the post- liberalisation period. Prices in India basically increase due to an increase in petroleum product prices, primarily because petroleum is the vital input in many manufactured items and also an essential fuel for road transport, aviation and even the Railways. As transportation costs rise, the prices of other products tend to rise in general. A noteworthy instance of price rise is the demand-pull factors that led to a steep rise in the price of onions in the year 2000, causing an artificial shortage in the market.

In India, inflation is calculated on the Wholesale Price Index (WPI), representing the increase in the wholesale market. But it differs greatly if calculated on the Consumer Price Index (CPI), which matters more to the consumer. However, calculation of inflation is on the wholesale prices because these are more or less the same throughout the country, while the consumer or retail prices vary across different regions (rural and urban) and also among different cities, depending on consumer preferences for certain products, the supplies and the purchasing power. Taxes levied by different states also play an important role in the variation of prices of the same product from one state to another.

 

Though wholesale prices rise at a slow pace (2-3%) comparatively, consumer prices tend to rise at a faster rate (8-9%), which is why we feel the pinch. One of the reasons for this is the substantial retailer's margin, which is built into what the consumer pays. Besides, the way the two indices are calculated differ both in terms of the weightages assigned to respective products as well as the kinds of items included in the basket of products. However, inflation is a necessary evil for developing and developed countries. 



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