Explained: What Is Inflation And How It Is Calculated

Governor of the Reserve Bank of India (RBI) Shaktikanta Das has stated that the inflation rate in January 2022 should not surprise or frighten anyone.

"As far as India is concerned, if you look at the momentum of inflation right from last October onward, it is on a downward slope. It's primarily the statistical reasons, the base effect, which has resulted in higher inflation especially in Q3 and the same base effect will play in the coming months," Das said in a press conference.

According to the data provided on Monday by the Ministry of Statistics and Programme Implementation, India's benchmark inflation rate, defined by the Consumer Price Index (CPI), climbed to a seven-month high of 6.01 per cent in January 2022.

Reuters

For the first time since June 2021, CPI inflation in January 2022 was slightly higher than the 6.0 percent top limit of the monetary policy committee's medium-term projection range of 2-6 percent. In December 2021, inflation measured by the Consumer Price Index was 5.56 percent.

What exactly is inflation?

Inflation is the gradual rise in the price of goods and services. Inflationary pressures indicate that a country's economy is in jeopardy, but negative inflation, often known as deflation, is a far more serious issue. In order to encourage spending among businesses and consumers, and therefore build a baseline of economic growth, a level of inflation that is neither too hot nor too cold is required.

In India, price indices are used to determine changes in commodity and service rates, and so inflation or deflation is computed. The overall inflation rate, commonly known as the headline rate, Inflation is calculated by taking into account increases in the price of food, fuel, and other goods.

Unsplash

When it comes to measuring inflation, a product's weight is higher if customers spend a larger portion of their money on it. Food and gasoline, for example, are more expensive for households than postcards or shaving creams, so they are given higher weights when calculating inflation. As a result, a change in food or fuel prices has a higher influence on inflation than a change in shaving cream prices.

While high inflation can stifle the economy by lowering purchasing power, too-low inflation can also stifle growth by retaining too much money in savings accounts, as consumers hold off on spending while waiting for the value of their dollars to rise. The optimal inflation rate encourages people to spend now rather than save later, resulting in just-right economic development.

In India, the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) are used to measure inflation (CPI).

What is WPI and how does it work?

WPI, as the name suggests, measures wholesale prices and was used by the Reserve Bank of India to make monetary policy until 2014. The wholesale pricing index (WPI) is the price of a typical basket of wholesale items. It considers a basket of 697 items and displays the total costs.

BCCL

Manufactured Products (65% of total weight), Primary Articles (food, etc.) (20.1%), and Fuel and Power (5% of total weight) make up the WPI basket (14.9 percent). The Ministry of Commerce and Industry calculates the WPI.

How Is India's Economy measured?

The fundamental reason why the RBI changed to the Consumer Price Index under ex-governor Raghuram Rajan is that it ignores services and bottlenecks between wholesalers and retailers.

What is the Consumer Price Index?

The CPI is a measure of price change at the retail level that is based on 260 commodities, including some services. The Ministry of Statistics and Programme Implementation collects prices of sample goods and services on a regular basis (typically every month) and records any changes.

To compare rate measures, a base year is utilised. This can be thought of as the 'first' year in the given time frame. To make computations easier, prices in the base year are frequently assumed to be 100.

For more on news and current affairs from around the world please visit Indiatimes News.