What is Inflation and how it is calculated?
What is Inflation: Inflation means “a general rise in the prices of goods and services over a time period which results in the loss of currency purchasing power.” It is observed that when the general price level rises due to rise in inflation, we are forced to buy fewer goods and services as we were buying earlier. We can explain them by quoting an example here. If we were buying one liter of Milk for Rs. 10-12 in 1995 then the same Milk we are buying at Rs. 40-45 in 2015. Thus, we can say inflation results in loss of value of money purchasing power.
Types of Inflation
Inflation is divided into the following two categories:
- Demand – Pull Inflation: – The Demand-Pull inflation is caused due to an excess of demand over supply. In a simple word, we can say it occurs when the demand cannot be fulfilled due to the limited supply which cannot be expanded any more.
- Cost – Push Inflation: – The Cost-Push inflation is caused due to a general rise in price levels occurs due to rise in the input cost. The factors which contribute to Cost-Push inflation are Rising Wages, Increases in Corporate Taxes, and Imported Inflation.
How Inflation is calculated?
Inflation is calculated by taking the Wholesale Price Index (WPI) as a base. The Wholesale Price Index (WPI) generally refers to the Whole Sale Prices of products and services instead of Retail Consumer Prices. The Formula for calculating Inflation is given below:
(WPI in month of current year-WPI in same month of previous year)
——————————————————————————————- X 100
WPI in same month of previous year