Measurement of Inflation (Managerial Economics Notes) (BBA/MBA Notes)

Posted on Jun 5 2020 - 6:05pm by Preeti

Measurement of Inflation and Measures to Control Inflation

Degree of Inflation

According to swiftness of rise in price level or intensity of increase in the general price level the inflation may be
(a) creeping inflation,
(b) running inflation,
(c) galloping inflation, and
(d) hyper inflation.

(a) Creeping Inflation
This is show moving and a very mild inflation. When the general price level rises mildly say to 2% annually, we may say that creeping inflation prevails.

(b) Running Inflation
The rate of increase in the general price level reaches double digit in the case of running inflation.

(c) Galloping Inflation
In the case of galloping inflation, the general price level readers double digits or even triple digits. The rate of increase in inflation may be 50% or 500%.

(d) Hyperinflation
The danger in persistent inflation is that it may become a hyperinflation when not in control. In such cases value of money declines rapid. Sooner or later currency ceases to be acceptable and transactions take place either in a foreign currency or in terms of some commodity.

(e) Demand Inflation
Demand inflation is an inflation which is mainly induced by excessive demand when supply constantly falls to keep up with demand.

(f) Cost Inflation
Cost inflation is an inflation which is mainly induced by rising costs of production, particularly rising wages.

Measurement of Inflation

Many developing countries use changes in the consumer price index (CPI) as their central measure of inflation. In India, CPI (combined) is declared as the new standard for measuring inflation (April 2014). CPI numbers are typically measured monthly, and with a significant lag, making them unsuitable for policy use. India uses changes in the CPI to measure its rate of inflation.
The WPI measures the price of a representative basket of wholesale goods. In India, this basket is composed of three groups: Primary Articles (22.62% of total weight), Fuel and Power (13.15%) and Manufactured Products (64.23%). Food Articles from the Primary Articles Group account for 15.26% of the total weight. The most important components of the Manufactured Products (Food products 19.12%) Group are Chemicals and Chemical products (12%); Basic Metals, Alloys and Metal Products (10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and Transport, Equipment and Parts (5.2%).
WPI numbers were typically measured weekly by the Ministry of Commerce and Industry. This makes it more timely than the lagging and infrequent CPI statistic. However, since 2009 it has been measured monthly instead of weekly.
A Consumer Price Index measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households.The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.

Calculating the CPI for a single item

Calculating the CPI for multiple items

Many but not all price indices are weighted averages using weights that sum to 1 or 100.

Example: The prices of 85,000 items from 22,000 stores, and 35,000 rental units are added together and averaged. They are weighted this way: Housing: 41.4%, Food and Beverage: 17.4%, Transport: 17.0%, Medical Care: 6.9%, Other: 6.9%, Apparel: 6.0%, Entertainment: 4.4%. Taxes (43%) are not included in CPI computation.

Consumer Price Index (CPI) for multiple items

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