By Mohd. Rafi Hajam
IN current times, inflation is a burning global issue. The main reasons (at global level) being geopolitical crisis, supply-chain disruptions, trade sanctions, erratic exchange rates and the aftermath effects of the COVID-19 pandemic.
Inflation is dangerous because it directly affects the standard of living of the people. These days, all the economies of the world—underdeveloped, developing and developed nations—suffer from inflation.
Inflation, in simplest terms, can be defined as the increase in the prices of most goods and services (of common use) over a given period of time. It measures the average price change in a basket of goods and services over a given period of time. Due to inflation, the purchasing power of a currency unit decreases as goods and services get expensive and this decreasing purchasing power of the currency directly affects the cost of living of the people and their spending and buying habits.
For instance, you bought a list of household essentials last month at an expense of Rs. 2,000 but this month, the price of a certain food item in the same list has risen and that has led to an increase in the cost to (say) Rs. 2100. Now, you have two choices: either you may be forced to reduce an item from your buying list or buy the same list of goods by paying an extra amount of Rs 100. This extra Rs. 100, which you pay for the same list of goods is due to inflation. In every country inflation is measured by a central authority and in India, inflation is measured by “The Ministry of Statistics and Programme Implementation”.
How is Inflation measured?
In India, the inflation rates can be measured at three levels: producer, wholesaler and retailer (consumer). Prices generally rise at each level till the commodity finally reaches the hand of the consumer. These are described very briefly below:
Consumer Price Index (CPI): It is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers. CPI is based on 260 commodities, but it includes certain services too. CPI is also called a market basket; it is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education, etc. The base Year for CPI is 2012. This index is used to calculate the Dearness Allowance (DA) for government employees. In India, there are four consumer price index numbers, which are calculated, and these are as follows: CPI for Industrial Workers (CPI-IW), CPI for Agricultural Laborers (CPI-AL), CPI for Rural Laborers (CPI-RL) and CPI (Rural/ Urban/ Combined).
The Wholesale Price Index (WPI): This is the most popular inflation rate calculation methodology in India. The index used to calculate wholesale inflation is known as ‘Wholesale Price Index’. This method measures the average change in prices of goods at the wholesale level. This inflation rate is often known as headline inflation. It shows the combined price of a commodity basket comprising 676 items. WPI (2011-12) reckons only basic prices and does not include taxes, rebate/ trade discounts, transport and other charges. The new series of WPI with base 2011-12 is effective from April 2017.
Causes of Inflation
There are two types of factors that can cause inflation in an economy. They are Demand Pull Inflation (DPI) and Cost Push Inflation (CPI). DPI factors include the rise in population, increase in money supply, black money, rise in income, excessive government expenditure etc., while as CPI factors include the increase in production costs, rise in Minimum Support Price (MSP), rise in international prices, hoarding and black marketing, rise in indirect taxes etc.
Rising prices are a cause of concern not only for our country but also for the world at large, as the price rise over time reduces the purchasing power of the consumer.
Looking at the data on inflation rates released last month (12th January, 2023), the National Statistical Office (NSO) reported that the country’s retail inflation, which is measured by the Consumer Price Index (CPI), dropped to a 1-year low of 5.72% in December 2022 from 5.88% in November, 2022. This year, on 16th January, the Ministry of Commerce and Industry reported that the Wholesale Price Index (WPI), which calculates the overall prices of goods selling at wholesale prices, hit a 22-month low of 4.95% in Dec’2022, from 5.85% in Nov’2022. This is for the first time in the calendar year-2022 that the CPI inflation hit below the RBI’s upper margin of 6%.
Decline in the rate of inflation in December, 2022 is primarily contributed to the fall in prices of food articles, mineral oils, crude petroleum and natural gas, food products, textiles and chemicals & chemical products. However, major economies of the world—like the USA, the UK and other European countries—observed hikes in the inflation rates due to the Russia-Ukraine war. CPI inflation reached historically high levels in the US at 8.6%, at 9.1% in the UK and at 7.9% in Germany in May 2022. In Japan, where CPI inflation often remains negative, it increased to 2.4%. In comparison to these nations, India’s inflation rate was the lowest because of the timely steps taken by the Reserve Bank of India.
At the global level, Zimbabwe (269.0%), Lebanon (162.0%), Venezuela (156.0%) and Syria (139.0%) have the highest rates of inflation in the world, as per the records/ data of October 2022. Overall, the data further indicated that more than 100 countries have inflation higher than India. Among the major economies in Asia, inflation in Sri Lanka stood at 64.30%. Iran, Pakistan, Kazakhstan and Myanmar had inflation of 52.20%, 26.6%, 18.8 %, and 16.1%, respectively, in October 2022.
The heat of increasing inflation is not only felt by the economy at large, but also by the individuals; i.e., by the consumers who resort to savings from their earnings. Inflation, however, silently enters our pockets and eats up the hard-earned monetary wealth saved with different motives.
Inflation is not always a bad thing; instead, inflation at a moderate level is desired in the economies, especially in developing countries like India. Uncontrolled and unchecked inflation can ruin the whole economy. Therefore, the responsibility for the government, policy makers, politicians and economists is to protect and safeguard the common man from the rising prices. Both the central government and the central bank (Reserve Bank) should try to tackle inflation with their policies which are known as Fiscal and Monetary Policies respectively.
Inflation is increasing day by day. It is obvious that the rate of inflation in the next 10 to 15 years will be much higher than today. Therefore, the best way to beat inflation is to invest money in such avenues in which there is a possibility of getting returns equal to or more than the inflation rate. Additionally, keeping an eye over monthly released inflation figures apprises us of the current state of our currency. It is always a prudent decision to plan spending and investment as per inflation rates. Since inflation is a macroeconomic phenomenon with an impact at the micro level, therefore taking decisions judiciously at the micro level can help to restrict the inflation at the macro level.
Views expressed in the article are the author’s own and do not necessarily represent the editorial stance of Kashmir Observer
- The author is Assistant Professor, Economics, at Govt. Degree College Sogam (Lolab), Kupwara. Feedback at [email protected]
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