Inflation is the name of the game...!

If we obeserve the newpapers these days, we find most of the news columns about infalation. And most of opposition parties are fighting against the ruling parties to contorl the inflation. At the same time ruling parties and RBI are seriously trying to control the inflation. The common man is suffering from the high commodity rates due the high inflation. As every one has 'inflation' on thier lips its a small try from my side to summarize, what exactly inflation and how it raises.

Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Essentially what this means is that the value of our money is going down and it takes more money to buy things.

The inflation rate is deremined by the finding the difference between price levels for the current year and the previous given year. To measure the price level, economists select a varity of goods and construct a price indexs. India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy while most countries use a consumer price index (CPI). 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 435 commodities data on price level is tracked through WPI, which is an indicator of movement in prices of commodities in all trade and transactions. The data is available weekly and it helps the Indian governament to calculate the inflation weekly. Dividing the WPI the beginning price level and then multiplying the result by 100 do this.

There are several reasons as to why an economy can experience inflation.
First one is the demand-pull theory, which states that all sectors in the economy try to buy more than the economy can produce. Shortages are then created and marchants lose business. To compensate, some merchants raise their prices. Other doesn’t offer discounts or sales. In the end, the price level rises.
Second explanation involves the deficit of the Cash Reserve Ratio (CRR). If the RBI expands the money supply to keep the intrest rate down, the CRR deficit can contribute to inflation. If the debt is not monetized, some borrowers wil be crowded out if intrest rates rise. This results in the CRR degicit having more of an impact on output and employment than on the price level.

A third reason involves the cost-push theory, which states that lobor groups cause inflation. If a strong union wins a large wage contact, it forces producers to raise their prices in order to compesate for the increase in salaries they have to pay.

The fourh explanation is the wage-price spiral, which states that no single group is to balme for inflation. Higher prices force workers to ask for higher wages. If they get their way, then producers try to recover with higher prices. Basically, if either side tries to increase its position with a larger price hike, the rate of inflation continuew to rise.

Finally, another reason for inflation is excessive menetary growth. When any extra money is created, it will increase some group’s buying power. When this money is spent, it will cause a demand-pull effect that drives up prices. For inflation to continue, the money supply must grow faster than the real GDP.

The most immediate effects of inflation are the decreased purchasing power of the rupee and its depreciation. Depeciation is especially hard on retired people with fixed incomes because their money buys a little less each month. Those not on fixed incomes are more able to cope because they can simply increase their fees. A second destabilizling effect is that inflation can cause consumers and investors to changes their speeding habits. When inflation occurs, people tend to spend less meaning that factories have to lay off workers because of a decline in orders. A third destabilizing effect of inflation is that some people choose to speculate heavily on an attempt to take advantage of the higher price level. Because some of the pruchases are high-risk investments, spending is diverted form the normal channels and some structural unemployment may take place. Finally, inflation alters the distribution of income. Lenders are generally hurt more than borrowers during long inflationary periods, which means that loans made earlier are rapaid later in inflated rupee.