What is Inflation?

“Inflation” refers to the process in the ongoing pricing structure of the economy. Mainly inflation leads to the increase of product price in a particular period of time. It has been found that the overall cost of living standard in a country or increase of price of commodities under any particular circumstances has been regarded as inflation. With the passing of time the increase of price of commodities simultaneously reduces the purchasing capacity of people per unit of money. On the other hand, a loss of real value in the medium of exchange has been witnessed in inflation.

A. Types

According to the criteria inflation has several types such as demand-pull inflation, cost-push inflation and Built-in inflation.

1. Demand-pull inflation leads to the increase of supply of money and demand of consumers in the market. The steady increase of demand for products or services leads to the rise of price or inflation.
2. In Cost-push inflation the national income is reduced along with the decrease in supply of products in the market.
3. Built-In Inflation is a type that refers to the high demand of wages in the firm by workers due to the increase of commodities for living.

B. Causes

The causes of inflation can be the following-

1. changes in the process of pricing of raw materials in the business environment
2. Increase of wages of labour
3. On the other hand, development of taxes by the government in the country
4. Reduction of productivity in business companies lead to decrease of quality of goods and services and lowering sales

C. Effects

The effects of inflation can be the following-

1. In the economic environment there are incidents of hidden cost that have been witnessed in the price of commodities due to inflation. Moreover, the unpredictable or sudden change in inflation rate is not suitable in the business economy.
2. Inflation leads to unemployment in society, reduction of disposable income of people in the families and change occurs in the demand and supply of commodities. Companies are forced to move their resources in the increase of price of raw materials and goods in increase of inflation in the market.

D. Measures to control Inflation

1. Wholesale price index (WPI) has been estimated by the ministry of commerce and economy to estimate the inflation rate on a monthly basis. The control of inflation can be developed by implementing these price indexes to measure the estimate behind the rise of retail price of goods.
2. Consumer price index (CPI) measures the changing price of goods and items in the market.
3. Core price index measures the price which is paid by consumers for particular goods and services without any movement of volatile cost. It also measures the inflation trend.

E. Calculating rate of inflation

In order to calculate inflation rate at first the decisions have to be taken for calculating the inflation rate. Average consumer price data has to be gathered through CPI for calculating inflation rate. Then labelling the price point is required as the initial price as A and the second price as B. Finally, it has to be put in the inflation formula for doing the calculation. The formula of calculating inflation is -

Inflation Rate = ((B – A) / A) x 100

F. Inflation in India

Inflation in India has been witnessed for a certain period of time to be consistent in the economic environment. The weak demand and limited power of pricing among consumers are the reasons behind the persistence of inflation in the country. The core goods inflation increased to 7.6% in recent years. The elevation of inflation pressure has been noticed in India due to the ease of domestic increase of demand for goods and services and increase of higher output services.

The inflation rate of India in the last 10 years is the following-

G. Inflation in other countries

In other countries such as the U.S, Pakistan, Turkey the cause of inflation worry is predominant in recent years especially in the post pandemic period. In the U.S the inflation increased to 3.2% in 2024 from a year back. On the other hand, in the case of Pakistan the year-on-year inflation was 22% in February 2024. It has been found that this primarily is the lowest rate of inflation in Pakistan since 2022. The increase of inflation rate in countries has been regarded as a cause of increase in the price of commodities and loss of income of people.

FAQs

1. What is sonic inflation?

Sonic inflation is the stage which can occur in the economic environment before starting hyperinflation.

2. What is core inflation?

Core inflation refers to the change in price of goods or services among which the energy and food sector is not included.

3. What is WPI inflation?

WPI or The Wholesale Price Index is the measuring tool of inflation that reflects changes in the process of average change in price of goods and services at wholesale market.

4. What is CPI inflation?

CPI or Consumer Price Index is the tool of addressing the increase of price in consumer goods and the purchasing process.

5. What is deflation?

Deflation is regarded as the general decline of cost and price of services and product in the business market.

6. Who is responsible for controlling inflation?

The Reserve Bank is the authority to control inflation. Through monetary policies and fiscal policies, the inflation can be controlled by the Reserve Bank. The Reserve Bank increases repo rate, bank rates and cash reserve ratio to control inflation.

7. How inflation and depletion are controlled by the central bank?

Inflation can be controlled by contractionary monetary policy. The falling of consumption leads to the fall in price of goods which is controlled by the central bank as well.

8. Which country has the highest inflation rate?

Venezuela has the highest inflation rate.