May 04, 2012

Inflation

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Persistent rise in the general price level or "fall in the value of money" is called inflation. Have a look at some important points about Inflation.

Price Level and purchasing power or value of money are inversely related.
Changes in price level are measured in terms of whole-sale price (WPI) Index.
WPI is released by the Department of Industrial Policy and Promotion.
WPI is constructed weekly since 1942 and shifted to monthly in Nov. 2009.
M.C.Singh is the Economic Advisor, Ministry of Committee and Industry.
The present no. of commodities in WPI in 4385, it increased to 676 items.
With effect from Sep. 14 2010, new series of WPI base year 2004-05, replaced 1993-94 base year series. Highest weight in this Index is given to manufactured items.
Abjhijit Sen Committee recommended this shift of base year.
Services remain excluded from WPI.
No. of Quotations selected for collecting price data for the items is 5482.
Weights : Primary articles : 20.12%, (decrease from 22.03%) manufactured products : 64.97% (increase from 63.75%) for construction of WPI.
Inflation first appeared in 2nd Plan.

Types of Inflation :

Demand - Pull Inflation : Aggregate demand is greater than aggregate supply. This results in Demand - Pull Inflation.

Cost - Push Inflation : Increase in cost of production leads to cost-push inflation. Under this comes

Wage-push inflation

Profit-induced inflation

Increase in indirect taxes by Govt.

Mixed Inflation : Schultz proposed this. The features of Demand - Pull and Cost - Push inflation are found in this.

Stagflation is a sustained increase in price-level and rising unemployment.

Philips curve shows relationship between changes in wage rate and unemployment which is inverse.

Structural inflation refers to the inflation that arises as a result of supply inelasticity and structural rigidities in the industrial sector. "Double deflation" refers to recession occurring twice with a small gap in between.

5.5% inflation is comfort zone according to RBI.