INFLATION AND ITS EFFECTS

INFLATION AND ITS EFFECTS

Subject: Economics

Context: Global Inflation usually spills over to emerging economies through the commodities channel which is already showing up in the WPI which captures inflation in the producer’s level.

Concept:

• Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
• Inflation measures the average price change in a basket of commodities and services over time.
• The opposite and rare fall in the price index of this basket of items is called ‘deflation’.
• Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
• However, a moderate level of inflation is required in the economy to ensure that production is promoted.

Who measures Inflation in India?

• Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of the economy. In India, the Ministry of Statistics and Programme Implementation measures inflation.
• In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index) which measure wholesale and retail-level price changes, respectively. The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.

Adverse impacts of inflation:

• Inflation causes decrease in the real value of money and other monetary items over time.
• Inflation causes uncertainty over future and this may discourage investment and savings.
• High inflation may lead to shortages of goods if consumers begin hording out of concern that prices will increase in the future.

Favorable impacts of Inflation:

• Inflation ensures that the central banks adjust the interest rates.
• Inflation encourages non-monetary investment.