Inflation - Too much money chasing Too few goods

People in India whether they are living a luxurious life or living in poverty life and no matter what may be the present state of economy is, always bothered about one aspect of economy i.e. the monstrous inflation (Mhengaai).
Inflation

Articles relation to Inflation


Even economists and financial experts view Inflation as most elusive and a herculean task to explain. But, the bigger question is, how do common people like you and I get know that there is inflation? 

That’s a rhetorical question and answer is known to all folks. Just take casual stroll to any vegetable market you will get to hear veggie hawkers’ peculiar style of hawking like Aloo le lo ek kilo ka tiss (Rs.30), bhindi ek kilo ka sataar (Rs 70) etc. The moment when you would pass a vegetable shop as a passerby you would hear “bhaiya/bhabiji kuch lena hai, aloo  kitna ka doon”.  

After a short conversation with the shopkeeper one can easily reckon the rate of desi inflation. This is the only method calculating inflation for a common citizen of India. In India from rags to riches, all, once in a life have felt the blistering heat of both sun and inflation. Our weather, one of the linchpins of inflation, is either feast or famine.

Let’s get back to the basics and try to understand the technical aspect of a stubborn inflation.

What is inflation?

Inflation is a state of economy in which the general prices of gamut of commodities and services become astronomically high.  Another way we can say that “too much money chasing too few goods”.

At first place, one might wonder what this 7% or 8% inflation is all about but there are a lot of subtleties lie behind this simple figure.  For that matter, WPI and CPI are the two vital factors which play a vital role in entangling this tangled concept. These are called price indices which are prominently used to calculate inflation. Mainly, consumer Price Index is adopted by countries like USA, UK Japan and China and wholesale Price Index is adopted by India.

The RBI focuses on developments in the Wholesale Price Index (WPI). However, the Consumer Price Index (CPI) is referred to when the WPI is not able to reflect the true picture due to high volatility in prices. This multiplicity of inflation indices available in India has often been described as problematic and often argued upon.

WHOLESALE PRICE INDEX (WPI)

Wholesale Price Index is the primary index used by India to calculate inflation .The WPI consists of a basket of 676 commodities (revised from 435 with base year 1993-94) and their price changes are used to calculate the value of the index. The base value of the index is taken to be 100 with base year 2004-05 now the base year has been shifted to 2010-11. The revised WPI numbers have been adopted in September 2010. The percentage change in the value of the index over a specified period reflects the inflation rate.

Calculation of WPI value

WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show the calculation, let us assume the base year to be 2000. The data of wholesale prices of all the 676 commodities in the base year and the time for which WPI is to be calculated is gathered. Then WPI of each commodity is calculated individually whereupon aggregated WPI is calculated to get a single WPI figure. Primarily, three clusters of commodities are taken into account primary articles viz. food articles, non-food articles etc, then fuel and power and lastly manufactured products.

Let us calculate WPI for the year 2013 for a particular commodity, say rice. Assume that the price for a kilogram of rice in 2000 = Rs. 20 and in 2013 = Rs. 25. Therefore, the WPI for the year 2013 is:-





Since WPI for the base year is assumed as 100, WPI for 2013 will become 100 + 25 = 125. In this way individual WPI values for the remaining 675 commodities are calculated and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. Commodities are given weightage in accordance with their influence on the economy.

Calculation of Inflation

If we have WPI values for two time zones, say beginning and end of the year, the inflation rate for the year will be :- 



For example, WPI on Jan 1, 2013 is 125 and that on Jan 1, 2014 is 133.75 then inflation for the year 2014 would be:-
                                    



Thus, we say that inflation for the year 2014 is 7%. But to get crisp and clear perspective on inflation, In India, WPI is calculated on weekly basis.

Who calculates this WPI? -  NSO, National statistical organization has been entrusted by Govt. of India to calculate WPI i.e., the mulish Inflation.

At present, RBI monetary measures to rein in obstinate inflation explicitly depend on the weekly WPI numbers rather than the CPI numbers as it is calculated on monthly basis. CPI is calculated on consumers’ end; so there is a huge variance in data collected under CPI than WPI. In future, RBI may take CPI numbers into account to draft its’ monetary policy, only if there is a slender variation in data collected.

Written By :-
Rohan Anand

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47 comments:

  1. Is dob certificate must for bob manipal po interview plz give reply sir
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    ReplyDelete
  3. Is dob certificate must for bob manipal po interview plz give reply sir
    Iam confused about it

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  4. I'm always confused
    How many types of books do you have bundle books, books for particular exam like RBI assistant, then this eBook
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    ReplyDelete
  5. Sir now a dayz RBI is emphasis on CPI....why....
    Nd wt r the benefists of this shiftmnt from WPI to CPI....

    ReplyDelete
  6. sir need materials for banking awareness

    ReplyDelete
  7. Whenever I release an ebook on a specific subject that means it's new and updated.

    Bundles are collections of ebooks. Section wise ebooks are part of bundles. If you purchase any bundle then you will get all the study material I have.

    ReplyDelete
  8. Banking awareness ebook will be updated soon

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  9. Calculation based on CPI are more accurate

    ReplyDelete
  10. but they also give the result that WPI is negative....
    why dnt they opt for only one method sir...

    ReplyDelete
  11. nd sir how much commodities r dere in CPI..

    ReplyDelete
  12. Dont buy anything use google. The ebooks are not worth the money

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  13. i need a hardcopy of this. how to get

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  14. nice informative article...

    ReplyDelete
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  16. Sir is this English book contains details explanation for grammar and other topics? or only answer key??

    ReplyDelete
  17. yesterday i bought RBI assistant preparation bundle....shall i have to buy this again

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  18. Thank you sir for your reply

    ReplyDelete
  19. Everything has detailed explanation, these are study notes.

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  20. send me an email - raman@bankexamstoday.com

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    ReplyDelete
  23. NO

    Send me an email for updates. raman@bankexamstoday.com

    ReplyDelete
  24. thank u sir....i am eagerly waitng 4 those books...

    ReplyDelete
  25. sir how many commodities are dere in CPI....like u said in WPI dere r 676...

    ReplyDelete
  26. Ramandeep Singh please reply whether BE in IT is eligible or not in IRDA Assistant?

    Please reply atleast , this site is becoming useless , if any one does not bother to reply to any query . Mentor , or Mod , just posting an article is not enough..

    ReplyDelete
  27. how much commodities r dere in CPI sir as u said in WPI dere r 676...

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  34. Sir i have bought SBI PO Pre Preparation Bundle. Shall i have to buy this again book Again plzzzz rply

    ReplyDelete
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  37. mail to - raman@bankexamstoday.com

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  38. shiv shankar vermaJuly 14, 2015 at 7:40 PM

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  42. Chaitanya Kumar ReddyJuly 24, 2015 at 1:44 PM

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