Why in news?
Headline inflation for the month of June is 6.1%. Demand supply mismatch during COVID 19 pandemic and higher inflation rate is worrying Indian economy.
More about the news?
- Disruptions caused to the supply of goods and services as a result of the nationwide shutdown can to an extent explain the acceleration in price gains, that this happened despite depressed demand is cause for disquiet.
- Prices in the food and beverages group rose an average 7.3% year on year
- Employers are set to cut jobs to cope with faltering demand, companies also plan to raise selling prices over the next 12 months to protect profitability.
What is Inflation?
- Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
- Inflation measures the average price change in a basket of commodities and services over time.
- The opposite and rare fall in the price index of this basket of items is called ‘deflation’.
- Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
- However, a moderate level of inflation is required in the economy to ensure that production is promoted.
Who measures Inflation in India?
- Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of the economy. In India, the Ministry of Statistics and Programme Implementation measures inflation.
- In India, inflation is primarily measured by two main indices WPI (Wholesale Price Index) and CPI (Consumer Price Index) which measure wholesale and retail-level price changes, respectively.
- The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use. CPI is also called as Headline inflation.
What are the main causes of Inflation?
Some key reasons for Inflation:
- High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.
- Excess circulation of money leads to inflation as money loses its purchasing power.
- With people having more money, they also tend to spend more, which causes increased demand.
- Spurt in production prices of certain commodities also causes inflation as the price of the final product increases. This is called cost-push inflation.
- Increase in the prices of goods and services is also a factor to consider as the involved labour also expects and demands more costs/wages to maintain their cost of living. This spirals to further increase in the prices of goods.
What is Stagflation?
- The term was coined by Iain Macleod, a Conservative Party MP in the United Kingdom, in November 1965.
- Stagflation is said to happen when an economy faces stagnant growth as well as persistently high inflation.
- With stalled economic growth, unemployment tends to rise and existing incomes do not rise fast enough and yet, people have to contend with rising inflation.
- So people find themselves pressurised from both sides as their purchasing power is reduced.