Important Notes : Inflation Notes For IBPS RRB / IBPS PO

Inflation

Inflation/deflation is the percentage change in the valuable goods and services on a year-on-year basis with respect to a base year. Inflation is the increase in prices of goods and services while deflation is the decrease in prices of goods and services with respect to the base year. 

Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods

Formula for calculating Inflation =

(WPI of current month in a year - WPI in same month previous year)

-------------------------------------------------------------------------------------- X 100

WPI in same month of previous year

In India, the Wholesale Price Index (WPI) was main index for measurement of inflation in India till April 2014. Then onwards RBI adopted new Consumer Price Index (CPI) (combined) as the key measure of inflation.

Types of Inflation

• Demand-pull inflation: inflation from high demand for goods and high employment. 

• Cost push inflation: inflation caused by the sudden decrease in the supply of goods, which would increase goods prices. 

• Pricing Power Inflation: It happens in oligopolistic markets, where prices are increased just to increase profit margins. 

• Taxation: Increase in taxes, cess, etc

• Production and Distribution Inflation: Increases in the cost of operations, production or supply chains.

• Sectoral Inflation: It takes place when certain sector of industries increase the price of its goods and services, which have a cascading effect on other industries, for example, cost of crude 

• Fiscal Inflation: Excessive government spending can lead to Fiscal Inflation, for example, Minimum Support Price, etc.

• Hyperinflation: Hyperinflation is also known as runaway inflation or galloping inflation. This can usually lead to the complete breakdown of a country's monetary system. 

Effects of inflation: 

• Price rise: Higher price is charged for the same quantity of goods and services.

• Creditors Lose: A creditor receives a reduced real interest rate. 

•  Debtors Gain: A debtor pays a lower real interest rate. 

A moderate level of inflation characterizes a good economy. An inflation rate of 2 or 3% is beneficial for an economy. In times of lower inflation, the interest rate also remains low, thereby encouraging buying and borrowing. 

Governments and Central Banks try to achieve lower levels of inflation.