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Inflation in India

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  • December 2008
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Inflation in India and comparison with Other Countries, its calculation, reason for rise of inflation and effectiveness of measures taken 1. How inflation is measured in India, and compares this to the way in which inflation is measured in other countries, e.g. the United Kingdom. Answer: Inflation has been defined as a process of continuously rising prices, or equivalently, of a continuously falling value of money. In other words, inflation causes the buying power of a dollar to decrease over time. Various Indexes have been devised to measure different aspects of the inflation. Some of the measures are CPI (Consumer price Index), Implicit Price Deflator (IPD), Producer Price Index (PPI), Employment Cost Index (ECI), and Gross Domestic Product (GDP), Retail Price Index (RPI). The most commonly used indexes are CPI and IPD. The method used to construct the CPI compares the current and base year cost of a basket of goods and services of fixed composition. For the CPI the base is a fixed "market basket" or bundle of goods and services representative of the purchases of urban consumers. The index is the ratio of today's cost of the fixed bundle to the base year cost of the same bundle. This kind of index implicitly assumes that the consumer's consumption pattern does not change in response to any price changes. The alternative index to the CPI is the implicit price deflator for personal consumption (IPD). This price index uses current period quantities as the weights rather than some fixed bundle. Current personal consumption is measured in today's prices and then compared to current personal consumption at prices from a base year. This price index method assumes that the consumer has made allowances for changes in relative prices.

Inflation, in India is measured by variations in the wholesale price index (WPI) on a year-on-year (Y-o-Y) basis. Currently, WPI (Base year 1993-94 =100) is a combined index of 435 articles/items, comprising 98‘primary...