In simple language, inflation is the rate at which prices increase annually. Essentially, prices go up due to two factors: A: cost-push factor
B: demand-pull factor
Cost-push factor inflation occurs when there is increase in cost of production of an item, which then gets translated into a higher price for that item in the market. Demand-pull factor inflation occurs when there is more money with the consumers compared to the total number of goods available in the market. With too much money chasing too few goods, prices rise because people are willing to pay more for the same item. This type of inflation generally happened when the demand exceeds supply. On the other hand, when prices fall it is known as deflation. However this is more of a theoretical concept as developing countries rarely experience deflation. Inflation in india:
A combination of both cost-push and demand-pull factor exist in india. However cost-push factors are more apparent in the post liberalization period. Prices in india basically increase due to an increase in petroleum product prices, primarily because petroleum is vital input in many manufactured items and also an essential fuel for road transport, aviation and even the railways. As transportation costs rise, the prices of other products tend to rise in general. A noteworthy instance of price rise is the demand-pull factors that led to a steep rise in the price of onions in the year 2000, causing an artificial shortage in the market. In india inflation is calculated on the wholesale price index (WPI), representing the increase in wholesale price market. But it differs greatly if calculated on the consumer price index (CPI), which matters more to consumers. However, calculation of inflation is on wholesale price index because they are more or less same throughout the country, while the consumer or retail prices vary across the different regions (rural and urban) and also among different cities, depending on consumer...