INFLATION

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

CALCULATION OF THE INFLATION RATE

Between any 2 years, one of which is the base year, the rate of inflation is the difference in the 2 index numbers.

Between any 2 years, neither of which is the base year,the rate of inflation is the difference in the 2 indexnumbers divided by the earlier index number X 100.

The base year is given the index 100 and is used as areference point for comparison.

The Annual inflation rate is:

_________________________last year’s CPI

X 100this year’s CPI – last year’s CPI

The inflation rate in India was recorded at 5.11 percent in January of 2015. Inflation Rate in India averaged 8.87 percent from 2012 until 2015, reaching an all time high of 11.16 percent in November of 2013 and a record low of 4.38 percent in November of 2014. Inflation Rate in India is reported by the Ministry of Statistics and Programme Implementation (MOSPI), India.

                                                                                                           

WHY IS INFLATION BAD?It reduces the power of your money to make purchases.

It causes people on fixed incomes to experience a fall in theirreal incomes.

It causes money tied up in savings to lose real value if therate of interest earned is not at least equal to the rate of inflation.It makes our exports less competitive and may cause people to buy the comparatively cheaper imports rather than pay rising prices.

CAUSES OF INFLATION•When the demand for goods and services outstrips the

economy’s capacity to produce them (i.e. excess demand over supply) then demand will pull up prices.

•Excess demand over supply can arise at times of rising general income levels.• Increases in the cost of factor inputs eg raw materials, wages etc, when passed on to the consumer will push up prices.•A growth in the money supply eg through excessive lending by the financial sector will reduce the value of the currency circulating round the economy.

It is an important performance indicator. It measures the rate of change in the general

level of prices. It indicates changes in the purchasing power of

the pound. It is calculated by using Consumer Prices

Index. This index features the most common items

purchased by average families (basket of goods) and monitors each month, changes in their prices.

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STUDY

India's wholesale price index fell for the second time in three months in January as oil prices slumped, bolstering prospects for further interest rate cuts by the Reserve Bank of India (RBI).

The wholesale price index (WPI) unexpectedly fell 0.39 percent last month from the same period a year earlier, its biggest decline since June 2009, government data showed on Monday.

The fuel price index tumbled 10.69 percent.

•Analysts had predicted a 0.4 percent year-on-year gain in wholesale prices, slightly faster than a provisional 0.11 percent increase in December.•The reading for November WPI inflation was revised down to -0.17 percent from 0.0 percent earlier.•The data comes days after annual consumer inflation came in at 5.11 percent, well below the central bank's medium-term target of 6 percent, and the trade deficit shrunk to a 11-month low.•While the RBI mainly focuses on consumer inflation to set its lending rates, analysts say improving trade gap and falling wholesale prices will help moderate retail inflation in the months ahead by providing stability to the rupee and easing input costs for firms.

U.S. producer prices recorded their biggest drop in more than five years in January as the cost of energy and a range of other goods tumbled, hinting at a disinflationary trend that could argue against the Federal Reserve raising interest rates.

Other reports showed housing starts fell last month, while manufacturing output rose marginally, signs of moderate economic growth early in the first quarter. "That, along with

persistently cool measures on inflation, will complicate decisions on the timing of a rate hike by the Fed. There is a clear consensus to obtain a liftoff this year, but the timing is still cloudy," said Diane Swonk, chief economist at Mesirow Financial in Chicago.The Labor Department said its producer price index for final demand fell 0.8 percent, the biggest drop since the revamped series started in November 2009, after dipping 0.2 percent in December. It was the third straight month of decline in the PPI.In the 12 months through January, producer prices were unchanged, the weakest reading since November 2010 when the new year-on-year series started, and braking sharply after a 1.1 percent rise in December.Economists had forecast the PPI declining only 0.4 percent last month and gaining 0.3 percent from a year ago.The decline in producer prices spilled over to the so-called core PPI as a strengthening dollar dampens imported inflation.A key measure of underlying producer price pressures, which excludes

food, energy and trade services, fell a record 0.3 percent last month after edging up 0.1 percent in December.While the Fed, which has a 2 percent inflation target, views the tame price environment as transitory, the broad-based weakness could cause discomfort among some policymakers.

The inflation rate in China was recorded at 0.80 percent in January of 2015. Inflation Rate in China averaged 5.65 percent from 1986 until 2015, reaching an all time high of 28.40 percent in February of 1989 and a record low of -2.20 percent in April of 1999. Inflation Rate in China is reported by the National Bureau of Statistics of China.

Chinese inflation plunged to 0.8% in January, its lowest level for more than five years, official data showed on Tuesday, fuelling fears the world’s second-largest economy is on the brink of a deflationary spiral.The rise in the consumer price index (CPI) was sharply down from the 1.5% recorded in December, and was lower than the 1% expected by economists.It was also the weakest number since 0.6% in November 2009.Moderate inflation can be a boon to consumption as it encourages consumers to buy before prices go up, while falling prices encourage shoppers to delay purchases and companies to put off investment, both of which can hurt growth.

STRATEGIES FOR TACKLING INFLATION

It Dampen down the level of demand by making borrowingand credit more expensive.Encourage increased capacity by encouraging business toexpand and new business to set up eg Enterprise Allowances,Grants etc.

Keep tight control of the money supply through reducedlending, increasing reserve asset ratio and higher interest rates.

Ensure wage rises are accompanied by productivity agreements.

THANK YOU BY- ANSHUL CLASS-XI