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Post at: Jun 25 2022

Inflation

Why in news 

  • Factory inflation based on Wholesale Price Index (WPI) surged to 14.55 per cent in March 2022 as against 13.11 per cent in February. It is 4 months high now.
  • Earlier, Ministry of Statistics and Program Implementation released data for retail inflation based on Consumer Price Index (CPI) which was at a 17-month high of 6.95 per cent in March 2022.

WPI Inflation 

  • The data released by the Commerce and Industry Ministry showed that crude oil prices were the biggest contributor to the rise in WPI inflation in March 2022 as compared to February 2022, followed by fuels and core items.

  • Inflation, broad-based one
  • All the three major categories namely primary articles, fuel and power and manufacturing recorded double-digit inflation in March 2022.
  • Food articles witnessed some softening month-on-month led by vegetables and pulses, even though wheat, paddy, potato, milk, egg, meat and the fish basket saw moderate increases during March.
  • During March, inflation in food articles eased to 8.06 per cent from 8.19 per cent in February. Vegetable inflation was 19.88 per cent in the month, as against 26.93 per cent in February.
  • Further, manufacturing inflation rose to 10.7 per cent in March from 9.8 per cent in February. Edible oils inflation increased further to 16.06 per cent (14.9 per cent), remaining in double digits for 28 months.
  • Even core inflation remained sticky and rose further to 10.9 per cent in March “This was led primarily by the uptick in inflation of manufactured items such as basic metals, chemicals and textiles
  • Jump in crude oil prices was the biggest contributor to the rise in the WPI inflation in March 2022 relative to the previous month, followed by fuels and core items.

CPI Inflation 

  • Retail inflation based on the Consumer Price Index (CPI) surged to nearly 7 per cent, a 17-month high, in March.
  • Food, the most volatile and dominant component of CPI with an almost 46% weight, has been the key driver of inflation, surging 7.7% in March from 5.9% in February.
    • All items under the food bracket except pulses witnessed a rise in inflation in March, as vegetables (11.6%), edible oils (18.8%) and ‘meat and fish’ (9.6%) posted the sharpest jumps.
    • The poor, whose consumption basket has a much larger share of food compared with the rest of the population, are bearing the brunt of elevated prices.
  • Core inflation rose to 6.4% in March from 5.8% in February, having exceeded the 5%-mark for 22 months now.
  • Though fuel inflation moderated to 7.5% in March from 8.7% in February.

Inflation and its Measurement
What is inflation?

  • Inflation is sustained increase in the prices of goods and services
  • Due to this purchasing power of the money decreases.
  • According to economist Keynes inflation arises due to excess of aggregate demand over aggregate supply.
  • Milton Friedman famously said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
  • Coulbourn defined inflation as” too much money chasing too few goods.”

Types of Inflation  

  • Inflation is mainly two types –Demand Pull and Cost push.
    • Demand pull inflation arises due to demand increases over supply.
    • Cost push inflation arises due to increases in prices of inputs i.e. rent, wages, interest or profit.
  • In developing economies like India   structural inflation also exists due to structural issues.
    • E.g. hoarding , checks on free flow of goods and services , administered pricing(e.g. MSP) etc.

Measures of inflation

  • In India there are mainly  two measures of inflation in India –Wholesale Price Index (WPI)  and Consumers Price Index(CPI).
  • CPI measures the inflation at retail level whereas WPI measure inflation at wholesale level.

Headline and Core Inflation

  • The headline inflation simply refers to the inflation in the CPI (or WPI) covering all the categories of goods and services
  • The core inflation excludes the volatile categories such as food and fuel in order to measure the increase in the prices of goods and services. 
  • Hence, a drastic fall in the food and fuel prices can bring down the headline inflation by a to a large extent. However, the core inflation may remain unaffected.
  • Presently, the RBI is targeting the CPI headline rate of inflation (and not Core Inflation).

 

 

 


 

 


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