Inflation final ppt

Group Members

₪ Ritesh Ranpise₪ Chandan Jaiswal₪ Punita Panchal₪ Stuti Mittal₪ Prince Lath₪ Shaili Sirohi₪ Kirtivardhan ₪ Abhishek Roy₪ Shruti Ajey

INFLATION Definition:

Inflation can be defined as a rise in the general price level of goods and services and therefore a fall in the value of money. That means the purchasing power of your ‘money’ decreases.

How Inflation is Calculated? There are two methods to calculate inflation - 1. Wholesale Price Index (WPI) 2. Consumer Price Index (CPI)1. Wholesale Price Index (WPI): WPI is the index that is used to measure the change

in the average price level of goods traded in wholesale market.

In India, a total of 676 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.

Cont…

The 676 commodities are divided into different groups & sub groups. Each commodity has some weightage in the WPI index. Below are the weightages of commodities group wise:

ITEMS Weightage

Primary Articles 20.1%

Fuel & Power 14.9%

Manufactured Products 65%

Formula:

WPI at end of year – WPI at beginning of year X 100 WPI of beginning of year

Example:WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st

1981 is 109.72 then inflation rate for the year 1981 is,

= (109.72 – 106.09) x100 =3.42% 106.09 So the inflation rate for the year 1981 is 3.42%.

Recent Changes in WPI

ITEMS Base Year (OLD 1993-94)

Base Year (NEW 2004-05)

Primary Articles 22% 20.1%

Fuel & Power 14.2% 14.9%

Manufactured Products

63.7% 65%

Consumer Price Index (CPI)

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

Most developed countries (UK, US, JAPAN and CHINA) use the Consumer Price Index (CPI) to calculate inflation.

Difference between WPI and CPI

Wholesale Price index (WPI) Consumer Price Index (CPI)

WPI is available on weekly basis. CPI is available on a monthly basis.

WPI contains commodities which are not even consumed by consumers. Example: Coarse grains that go into making of livestock feed.

CPI contains set of goods purchased and consumed by consumers.

WPI is measured in terms of price increase for the producers and traders.

CPI is measured in terms of price increase for the end consumer.

Choice of a Base Year

In determining the base year for any index number, a set of well-known criteria is followed. These include:

a) The base year should be a normal year, i.e., a stable year in respect of economic activities like production, trade, etc.

b) It should not suffer from business cycles;c) Availability of reliable price data for the selected year.d) The base year should be as recent a year as possible

so that by the time revised series of items and their prices are released, it should not have outlived its utility.

WHY 2004-05 SELECTED AS NEW BASE YEAR?

• The Annual Survey of Industries (ASI) data is the primary • source for the selection of the product basket and

derivation of product level weights for the manufacturing group of the WPI series.

• The availability of the latest ASI data for the year 2004-05 was one of the major factors for considering 2004-05 as the base year for the new WPI series.

• The year 2004-05, being a relatively recent year, the task of collection of backlog price data from this year onwards was expected to be more manageable.

• Furthermore, it was a normal year, free from any major economic upheaval.

Why India uses WPI?• Finance ministry officials point out that there are many

problems while shifting from WPI to CPI model.• First of all, they say, in India, there are four different types

of CPI indices and that makes switching over to the Index from WPI fairly ‘risky and unwieldy.’

The four CPI series are:1. CPI Industrial Workers2. CPI Urban Non-Manual Employees3. CPI Agricultural laborers'4. CPI Rural labour

Cont..

• Secondly, officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers.

• The WPI is published on a weekly basis and the CPI, on a monthly basis.

• And in India, inflation is calculated on a weekly basis.

Types of Inflation Demand - Pull Inflation Demand-pull inflation occurs when there is an increase

in aggregate demand, categorized by the four sections of the macro economy - households, businesses, governments and foreign buyers.

Cost Push Inflation

Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services curtail from an increase in the cost of production, we have cost-push inflation

Causes of InflationThere are various factors which cause inflation in

the economy -

Monetary Factors • Expansion of Money Supply

• Increase in Disposable Income

• Increase in Indirect Taxes

• Drop in exchange Rate

Cont…

Non-monetary Factors

• Rising Population

• Natural Calamities

• Speculation and Black Money

• Unfair Practices by Monopoly Houses

• Bottlenecks and Shortages

Cont…Structural Factors

• Capital Shortage

• Infrastructural Bottlenecks

• Limited Efficient Entrepreneurs

• Lack of Foreign Capital

• Imperfections of the Market

• Unemployment

Cont…

Global Factors

• Increase in International Prices

• Cold War with other countries

• Rise in Fuel Prices

Effects Of Inflation

Positive Effect

• Benefit the cartels formed by the companies

• Benefit borrowers

• Farmers Gain In Inflation

• Tobin effect

Negative Effect

• Hoarding

• Increased risk - Higher uncertainties

• Distortion of relative prices

• Fixed income recipients will be hurt

• Lowers national saving

• Rising prices of imports

• Income diffusion effect

• Illusions of making profits

• Rising prices of imports

• Existing creditors will be hurt

• Currency debasement

• Causes business cycles

• Causes an increase in tax bracket

Measures to control Inflation

The Various measures to control inflation are:

1.Monetary Measures

2.Fiscal Measures

3.Other Measures

Cont..

1. Monetary measures The monetary measures which are widely

used to control inflation are divided into- • Bank rate policy• Statutory Liquidity Ratio• Open market operation• Repo rate

Cont…• Reverse repo rate

• Cash Reserve RatioKey Rates 2009 April,

2010Dec, 2010

CRR 5.75% 6% 6%

Repo rate 5% 5.25% 6.25%

Reverse Repo rate 3% 3.75% 5.25%

Cont…

• Selective credit controls

• Moral suasion

• Credit authorization scheme

Fiscal Measures

• Taxation

• Government expenditure

• Public borrowings

• Protectionist measures

Other Measures

• To Increase Production

• Price Control

• Rationing

Food Inflation• Food price inflation is one of the most critical economic

problems in the country today.• Lower agricultural growth in India compared to the much

faster GDP growth.

• The high food price inflation is having a significant impact on the Indian consumer.

• The chart below gives the way the Indians spend.

Reasons for high Food Inflation

• Low production and productivity• The prevailing market inefficiencies – lack of

coordinated efforts in public procurement• Poor distribution• Wastage due to inadequate and poor storage

facilities• Inefficient public distribution system• Speculative trading • Increasing retail margins

Some Prescriptions

• The release of food grain stocks together with faster distribution.

• Part of Foreign Exchange Reserves can be used for bulk import of essential commodities.

• Improving food production and productivity.• Promoting Private sector Participation in Food

grain Management.• Stepping up investments• Foreign Direct Investment (FDI) in food retailing

Inflation Chart

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