GK Update: All about Inflation (Part II)

Dear Readers,

Inflation is a subject that always makes news and thus is very important for your upcoming exams. In this series of articles, we will look into the meaning of inflation and its types, factors affecting inflation, inflationary trends in India, its consequences, etc.

Types of Inflation

3. Hyperinflation: This occurs when prices of goods and services rise steeply and suddenly, when
the monthly inflation rate is higher than 50%. An unwarranted increase in
printing of paper currency, in effect an increase in money supply is one of the
principle causes of hyperinflation. While one of the best instances of
hyperinflation was Germany post World War I, when the government printed reams
of deutschemarks to fund the war. From 1913 to 1918, the number of marks in
circulation rose from 13 billion to 60 billion, not counting the value of
bonds. Money supply rose further for war reconstruction and the mark-dollar
exchange rate was around 4.2 trillion marks to the dollar by November 1923.

4. Stagflation: It
is characterised by a state of stagnancy i.e. low growth, high unemployment and
high inflation. It is unusual because policies to reduce inflation make life
difficult for the unemployed, while steps to alleviate unemployment raise
inflation. There are two main causes of stagflation as theorised by different
schools of economists- (i) A rise in oil prices results in a drop in production
output as transportation costs go up. Workers are laid off and there is a
general price rise, which reduces demand. (i) Artificially boosting the money
supply at a time when aggregate supply is constrained and poor monetary policy
is also a reason for stagflation. This phenomenon gripped the US in the 1970s
due to a rise in oil prices. It was observed in India, especially in 2014 when
growth was 4-5% and inflation was rising over 9%, with declining industrial
production.

5. Headline Inflation: This measure considers total inflation in
an economy, including food and energy prices, which are more volatile. In
India, it is measured in terms of the WPI.

6. Core Inflation: This
shows price rise in all goods and services except food and energy due to high prices
fluctuations. Oil is a highly volatile commodity, with daily price variations.
Food prices change based on gas prices (it heavily reflects on transportation
costs), which are directly linked to oil prices. As the government needs a
fairly stable and true picture of inflation, core inflation is calculated.

Key measures of
inflation in India

1. Wholesale Price Index
(WPI)
considers wholesale prices of goods i.e. those that are exchanged between
firms and not consumers. Thus, the percentage increase in WPI over a year gives
us the inflation rate for that year. WPI shows combined prices of a basket of 676
items. The office of Economic Adviser, Department of Industrial Policy and
Promotion and Ministry of Commerce and Industry calculate WPI.

Its weight is distributed among three major components: Manufactured products at 64.97% (includes
chemical, metal, food), primary articles
at 20.12% (food, non-food goods and
minerals) and fuel and power at 14.91% (mineral oil, electricity and
coal).

2. Consumer Price Index
(CPI)
considers consumer or retail prices of goods. Earlier, there
were four major segments of CPI, namely for industrial, agricultural and rural
labourers and urban non-manual employees (UNME). However, since January 2011,
only urban household and rural household-linked CPI is calculated by the
Central Statistics Office (CSO) and the Ministry of Statistics and Programme
Implementation. In April 2014, the RBI announced CPI (combined) i.e. both Urban
CPI and Rural CPI as the main measure of inflation in India. There are five
major components of CPI (combined): food,
beverages, tobacco
-49.71%, fuel and
light
-9.49%, housing-9.77%
(Rural CPI does not consider housing), clothing
and footwear
-4.73, Miscellaneous
(health, education, etc)
– 26.31%.

To view Part I of this series, click on the link below:

https://www.pagalguy.com/articles/gk-update-all-about-inflation-part-i-37689636

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