Inflation...

[gaurav1987]

Hey this is some information on what is Inflation....

Inflation occurs when there is a general rise in price levels. Inflation is potentially a very destabilising force. A small increase in prices can quickly escalate as people whose wages and other incomes have fallen behind try to catch up, leading to further increases in costs. That is why the government places such an important emphasis on controlling inflation. The principal means of doing this is through interest rates. When this Labour government came into power in 1997 one of the first things it did was to create the Monetary Policy Committee which works as part of the Bank of England. This committee is made up of officials from the Bank of England and independent experts who each month decide on an appropriate interest rate for the UK. The interest rate should be set at a level which deters inflation while stopping the economy from deflating rapidly.


Deflation involves a general slowdown or reduction in prices, which can have disastrous effects as employers cut their labour forces, and there is a general reduction in economic activity.
The Monetary Policy Committee has the responsibility for setting an interest rate which is in line with enabling the government to achieve a targeted level of inflation each year. This inflation rate is calculated by what is termed the Harmonised Prices Index which is a common measure for measuring price inflation in the European Union.
Inflation is harmful to trade. Manufacturers generally sell goods on credit. When they seek repayment they find that the money they receive is less than they expected. They therefore become reluctant to trade.
Inflation can also lead to unemployment. Businesses faced by rising costs may be forced to cut back on production and on the number of employees.
Comparative inflation rates are frequently used as an indicator of international competitiveness. If prices are rising faster in the UK than in Germany, France, the United States, Japan, Pacific Rim countries and other competing countries, then we will find it increasingly difficult to sell our goods abroad.
For example, suppose that a German bicycle and a British bicycle are the same price on international markets in 2000 but British domestic prices are rising faster than German ones. This may mean that in 2005 the German bicycle becomes cheaper than the UK one. Over a period of time this loss of competitiveness can be catastrophic.

[sujay mukherjee]

hi,
inflation is required 2 some extent,as in India is adout 3 to 4 % where as it devloped nation it is different therefor which is standard

[ankitgokani]

How India calculates inflation

Rising inflation was the most recent ticklish political issue that hit the Manmohan Singh government. But was inflation rising because of price rise in essential commodities? Or was it because of the 'erroneous method' of calculating inflation?

Some economists assert that India's method of calculating inflation is wrong as there are serious flaws in the methodologies used by the government.

Economists V Shunmugam and D G Prasad working with India's largest commodity bourse -- the Multi Commodity Exchange -- have come out with a research paper arguing that the government urgently needs to shift the method of calculating inflation.

Saying that there are serious flaws in the present method of calculating inflation, the paper India should adopt methodologies in developed economies.

So how does India calculate inflation? And how is it calculated in developed countries?

* India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.
* Most developed countries use the Consumer Price Index (CPI) to calculate inflation.

Wholesale Price Index (WPI)

WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s.

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

Consumer Price Index (CPI)

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

\CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

Economists Shunmugam and Prasad say it is high time that India abandoned WPI and adopted CPI to calculate inflation.

India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for.

"CPI is the official barometer of inflation in many countries such as the United States, the United Kingdom, Japan, France, Canada, Singapore and China. The governments there review the commodity basket of CPI every 4-5 years to factor in changes in consumption pattern," says their research paper.

It pointed out that WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level.

The paper says the main problem with WPI calculation is that more than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view.

Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation.

India constituted the last WPI series of commodities in 1993-94; but has not updated it till now that economists argue the Index has lost relevance and can not be the barometer to calculate inflation.

Shunmugam says WPI is supposed to measure impact of prices on business. "But we use it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the index. And it does not factor in services which have assumed so much importance in the economy," he pointed out.

But why is India not switching over to the CPI method of calculating inflation?

Finance ministry officials point out that there are many intricate problems from shifting from WPI to CPI model.

First of all, they say, in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are: CPI Industrial Workers; CPI Urban Non-Manual Employees; CPI Agricultural labourers; and CPI Rural labour.

Secondly, officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers. In fact, as of May 21, the latest CPI number reported is for March 2006.

The WPI is published on a weekly basis and the CPI, on a monthly basis.

source:rediff