What is inflation?

Inflation is the increase in prices of baskets of goods and services that represents economy as a whole. It is measured as an annual percentage increase. For e.g. We all love to watch movies; there was a time when movie ticket was for Rs 50 and now its cost Rs 100, the prices have doubled, this is how inflation affects us. Take another e.g. suppose with Rs 100 you can buy only 6kg of groceries , the same amount of money can only buy 6/ ( 1+I) kg of groceries next year , where I refers to rate of inflation beyond today. Thus if the rate of inflation is 5%, other things being equal you can buy only 6/1.05 worth of groceries.
Well all of us know what is inflation and what are its causes……..so I won’t be going much in to it….

Measurement scale of inflation
Inflation can be measured by the following 2 ways:
· Inflation based on changes in consumer prices for specific baskets of goods known as consumer price index (CPI).
· Inflation based on changes in average prices of goods traded in wholesale market called as wholesale price index (WPI)
In India inflation is calculated on the basis of WPI. WPI is calculated on weekly basis unlikely CPI that is calculated on monthly basis.
WPI in India includes a total of 676 commodities and tracks the change of prices in these commodities.
These goods can be classified as under:
· Primary articles ( food articles non-food articles and minerals)
· Fuel ,power ,light ,lubricants and manufactured products like food products , beverages , tobacco , textiles ,leather and leather products).
Now with one eg ill show how WPI is calculated
WPI is calculated on base year and WPI base year is assumed to be 100
Let’s calculate the WPI for year 2007: assume that price of kilogram wheat in 2007 is Rs 7 and for 1993-94 kilogram wheat costs Rs 5
Therefore the WPI of year 2007 is:
Price of wheat in 2007 – price of wheat in 1994 / price of wheat in 1994 *100
7-5 /5*100 = 40
Since WPI for base year is assumed to be 100, WPI for 2007 will become 100+40 =140.

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

(WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100)
For e.g. WPI on 1st January 2007 are 141.2 and on January 2008 are 144.4, then inflation rate for year 2008 is,

144.4-141.2 / 141.2 *100 = 2.26 %, therefore we can conclude inflation rate for the year 2008 is 2.26% (I know this number seems to be unbelievable but it’s just an e.g.)