Inflation in India- Causes and Options

Topics: Inflation, Money, Monetary policy Pages: 3 (1016 words) Published: November 29, 2010

Rising inflation is one of the biggest stories of recent weeks and has received a great deal of attention from the media and political parties. At the same time inflation is an economic problem that the average person meets on a daily basis in terms of higher prices particularly of food products. It is sustained rise in the general level of prices of goods and services over a certain period. In simple words it means too much money chasing too few goods. Recent data shows that the inflation crossed the double digit figure and rose to 10.16% in May 2010.Food inflation is 16.44% for the week ended Sep 18th, the 5th straight week for a steady climb! Why are prices rising?

A number of factors, many of them are global in nature, but the chief among them, is the rise in the price of oil above $100 per barrel. Petroleum is used to make fertilizer and also as fuel in transportation so naturally when oil prices rise it affects food and other prices as well. Strong growth in big, developing countries like US & China also contributed to inflation by boosting demand for many commodities like cement and steel. This got transmitted to Indian economy. Finally poor monsoons and severe drought have reduced agricultural output further putting an upward pressure on the prices. A final push this time came from the domestic causes. Government has pumped in additional purchasing power in rural areas through schemes like NREGA and in urban areas, the 6th Pay Commission for the Centre Government employees offering a bonanza of hefty pay-packets [States too thereafter took the cue from the centre and similarly increased the salary of their employee] has given additional purchasing power in the hands of people.

How is inflation measured?
In India there are two broad measures of inflation: the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). Of the two the latter has a higher profile because it is measured more frequently. The WPI is based...
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