Prices of food and commodities are soaring literally, which in turn is showing a huge impact on the lives of the people, especially on lower income groups. The rise in the prices is due to the high inflation rate.
So what is this inflation?
Inflation is a sustained increase in the prices of goods and services, i.e., a higher price must be paid for purchasing a product or service. Inflation has become a major problem in India and the rate of inflation is increasing every year.
There are two types of inflation.
Demand-pull inflation arises when there is a huge demand for the same product in the market, i.e. when demand is more than supply.
This inflation arises when manufacturing companies increase the prices of the finished goods and cut the production to a certain extent due to the hike in the prices of raw material and wages. However, demand remains stagnant.
Inflation is measured using WPI and CPI.
WPI (Wholesale Price Index)
It measures and focuses on the prices of goods at the wholesale level. The goods are categorized into groups like primary goods or articles, fuel & power and manufactured goods. It is used to measure changes in the prices of goods at the wholesale level, i.e., between manufacturers and wholesalers.
WPI is also used by RBI in framing fiscal and monetary policies. It is calculated on a weekly basis.
CPI (Consumer Price Index)
It measures and focuses on the prices of goods and services at the consumer level. It is used to estimate the exact cost of living. It is calculated by considering the average price change of all goods. CPI figures are published monthly and is calculated once in a month.