INFLATION

Inflation
Process of overall price rise Calculated on the basis of price indexes:
WPI more common than CPI in India CPI for different segments: no harmonized CPI in India

Implicit GDP deflator.

Inflation

Demand Pull

Cost Push

Measuring Inflation
Price level A measure of the average prices of goods and services in the economy.

Inflation rate The percentage increase in the price level from one year to the next.

The Consumer Price Index Consumer price index (CPI) An average of the prices of the goods and services purchased by the typical urban family of four.

BASE YEAR (1999)

PRODUCT QUANTITY PRICE EXPENDITURES PRICE

2006
EXPENDITURES PRICE

2007
EXPENDITURES

Eye examination s Pizzas

1 20

$50.00 10.00

$50.00 200.00

$100.0 0 15.00

$100.00 300.00

$85.00 14.00

$85.00 280.00

Books
Total

20

25.00

500.00
750.00

25.00

500.00
900.00

27.50

550.00
915.00

FORMULA
Expenditur es in the current year CPI = Expenditur es in the base year 100

APPLIED TO 2006

APPLIED TO 2007

$900 100 120 $750

$915 100 122 $750

Measuring Inflation
Is the CPI Accurate?

Increase in quality bias.

New product bias.

Measuring Inflation
The Producer Price Index Producer price index (PPI) An average of the prices received by producers of goods and services at all stages of the production process.

Real versus Nominal Interest Rates

Nominal interest rate The stated interest rate on a loan. Real interest rate The nominal interest rate minus the inflation rate. Deflation A decline in the price level.

Price Indexes used in India

Wholesale Price Index (WPI)

Base year
1993-94

Compiled by
Office of the Economic Adviser, Ministry of Commerce and industry

Consumer Price Index for Industrial 2001 Workers (CPI-IW) Consumer Price Index for Agricultural 1986-87 Labour (CPI-AL

Labour Bureau, Ministry of Labour and Employment Labour Bureau, Ministry of Labour and Employment

Consumer Price Index for Rural Labour (CPI-RL)

1986-87

Labour Bureau, Ministry of Labour and Employment Central Statistical Organization

10

Consumer Price Index for Urban Non- 1984-85 manual Employees (CPI-UNME)

WPI
Base year 1993-94 (1993-94 = 100) 435 products (consumer, intermediate and capital) with value weights assigned:
Rice, wheat, vegetables, petrol, biscuits, textiles, medicines, cement, TV sets, motor vehicles etc

Services not included Wholesale prices (not retail prices) from selected markets Indices calculated for products/sub-groups/groups/all commodities by calculating the weighted average of price ratios between the current period and the base year Monthly/weekly data published in www.eaindustry.nic.in
11

WPI
No of products All commodities Primary articles Fuel, power Manufactured products 435 98 19 318 Weights April,

2010
100.00 22.03 14.23 63.75 253.7 289.7 364.0 216.6

12

The base year against which price rise is measured is also being advanced by a decade to 2004-05, starting from monthly inflation data for August,2010 to smoothen out the index by reducing fluctuations. There is a substantial increase in the number of items in the basket of manufactured products. In the new series, there would be 555 items compared with 318 items at present. Under primary article group of the new WPI, there would be 102 items as against 98 at present while fuel and power category would remain unchanged with 19 items.

Inflation rate
(Pt - Pt-1)/Pt)*100 Annual averages:
Pt = 52 week/12 month average of the index in a particular year Pt-1 = 52 week/12 month average of the index of the previous year.

Year-on-year (point-to point) basis:

Pt = Index in a particular week/month Pt-1 = Index 52 weeks/12 months earlier

14

-10.0

20.0

10.0

15.0

25.0

30.0

-5.0 0.0 5.0

1971-72

1973-74
1975-76 1977-78 1979-80 1981-82 1983-84 1985-86 1987-88 1989-90 WPI
15

Annual Average Inflation rate: CPI and WPI

CPI-IW 1991-92 1993-94 1995-96 1998-99 2000-01 2002-03

2004-05
2006-07 2008-09

Year-on-year Inflation rate: CPI and WPI

18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0

Percent

CPI-IW WPI

Jan-09

Jan-07

Jan-08

Year
16

Jan-10

Apr-07

Apr-08

Apr-09

Oct-07

Oct-08

Oct-09

Jul-07

Jul-08

Jul-09

Highest monthly inflation rates in history Country Currency name Hungarian peng Zimbabwe dollar Yugoslav dinar German Papiermark Greek drachma Old Taiwan dollar Month with highest inflation rate July 1946 November 2008 Highest monthly inflation rate Time Equivalent required for daily inflation prices to rate double 15 hours 24.7 hours 1.4 days 3.7 days 4.3 days

Hungary Zimbabwe Yugoslavia Germany Greece Taiwan (Republic of China)

4.19 1016 % 207.19% 7.96 1010 % 98.01% 64.63% 20.87% 17.84%

January 1994 3.13 108 % October 1923 29,500% October 1944 13,800%

May 1949

2,178%

10.98%

6.7 days