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What Is Inflation Rate and How Is It Calculated?
source: moneycontrol
What Is Inflation Rate?
Inflation rate is a percentage change in the value of goods and services over time. It denotes the fall in the purchasing capacity of the rupee. Inflation specifies how much the average price has changed for the basket of goods and services over a given period.
What Are the Causes of Inflation?
Different factors, including changes in money supply, costs of production and demand of the consumers, can cause inflation in an economy. It also comprises changes in oil prices at the global level. Following are some of the significant causes of inflation in India:
- Demand-Pull Inflation: It is one of India's primary causes of inflation, which happens when there is greater demand for goods and services than supply. This can occur due to an increase in the population, disposable income, government spending or other factors like an increase in exports.
- Cost-Push Inflation: Cost-push inflation occurs when there is an increase in production costs due to factors such as rising wages, raw material costs, taxes and an increase in import prices. This increases the prices of goods and services to maintain a firm's profit margin.
- Structural Factors: In India, inflation can also happen due to structural factors such as a lack of investment in infrastructure, inefficient distribution networks and insufficient production of agricultural products. Such factors limit the supply of goods and services in the economy, increasing prices.
- Monetary Factors: Monetary factors can also cause inflation in India. These factors include an increase in money supply, devaluation of the currency or lower interest rates. They can increase demand in the economy and decrease the consumers' purchasing power.
What Is a Good Inflation Rate?
A good level of inflation rate denotes fine economic conditions. Inflation rate of 2-3% is helpful as it motivates people to borrow more and buy more. It is because the interest rate also stays low during the lower inflation rate. Thereby, the central bank and the government always endeavour to attain a limited level of inflation rate.
How Is Inflation Rate Calculated?
There are two main measures of inflation: Wholesale Price Index (WPI) and Consumer Price Index (CPI). These indices measure the inflation in India monthly by taking into consideration various approaches to calculate changes in the prices of goods and services. This calculation helps the government and RBI understand the market's fluctuating price and observe the inflation rate.
- Consumer Price Index (CPI): It calculates the price changes at the retail level across 260 commodities. CPI considers the price changes at which consumers buy various products or services. This data is collected independently by the Ministry of Labour and the Ministry of Statistics and Program Implementation.
- Wholesale Price Index (WPI): WPI calculates the price change of goods at a wholesale level in the market across 697 commodities. It denotes the price change of commodities before it reaches the retailers.
What Is the Average Inflation Rate in India?
The average rate of inflation in India is calculated by Consumer Price Index (CPI). It had retail inflation of 5.66% in March 2023, which hit the lowest point in 16 months. Despite such a decline in the last month of the fiscal year, the average inflation rate of India was 6.66% through 2022-23. Furthermore, the inflation rate in India peaked in 1974, averaging around 28.60%.
What Is the Current Inflation Rate for Different Countries?
As you know what inflation rate is, the following table shows the inflation rate of various countries in 2019, 2020 and 2021:
| Countries | 2019 | 2020 | 2021 |
| Argentina | 53.5 % | 42.0 % | 48.4 % |
| Australia | 1.6 % | 0.8 % | 2.9 % |
| Bangladesh | 5.6 % | 5.7 % | 5.5 % |
| Brazil | 3.7 % | 3.2 % | 8.3 % |
| Canada | 1.9 % | 0.7 % | 3.4 % |
| China | 2.9 % | 2.5 % | 0.9 % |
| France | 1.1 % | 0.5 % | 1.6 % |
| Germany | 1.4 % | 0.5 % | 3.1 % |
| Hong Kong | 2.9 % | 0.3 % | 1.6 % |
| India | 4.8 % | 6.6 % | 5.1 % |
| Italy | 0.6 % | -0.1 % | 1.9 % |
| Japan | 0.5 % | 0.0 % | -0.2 % |
| Korea | 0.4 % | 0.5 % | 2.5 % |
| Malaysia | 0.7 % | -1.1 % | 2.5 % |
| New Zealand | 1.6 % | 1.7 % | 3.9 % |
| Pakistan | 9.4 % | 9.5 % | 9.5 % |
| Qatar | -0.7 % | -2.8 % | 2.3 % |
| Russia | 4.5 % | 3.4 % | 6.7 % |
| Saudi Arabia | -2.1 % | 3.4 % | 3.1 % |
| Sri Lanka | 4.3 % | 4.6 % | 6.0 % |
| UAE | -1.9 % | -2.1 % | 0.2 % |
| United Kingdom | 1.8 % | 0.9 % | 2.6 % |
| United States | 1.8 % | 1.2 % | 4.7 % |
Through this article, you got to know what the inflation rate is, and you should also know that it positively impacts the Indian economy. It increases the profits of producers of goods as they can sell them at higher prices. This can also benefit you while investing in the period of inflation as you get additional incentives to invest in production activities.
FAQs About Inflation Rate
What are the effects of inflation?
Inflation affects an economy in various ways. It increases the interest rate on borrowings and surges the prices of goods and services. However, it may benefit you by increasing the wages, which helps you improve your living cost.
What is the role of RBI and government in tackling inflation in India?
The RBI and government use various tools and policies to tackle inflation in India. It includes fiscal and monetary policies governed by the finance ministry and the RBI. Furthermore, the government can impose structural reforms to tackle the root causes of inflation.
Does inflation affect your life?
Inflation is a major factor that lowers your money's value over time. This means that the money you have with you at the start of a year will get you fewer goods at the end.
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Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.