What is: Inflation

Inflation, in simple terms can be referred as increase in prices. The inflation rate is normally calculated on the basis of Whole Sale Price Index (WPI). It is seen that the prices of different commodities are changing at different rates. Calculating inflation, we have the “price index”. The “price index” arrives at an overall rate of price increase by assigning different values depending upon how important or unimportant a particular commodity is. A wheat or rice which is consumed on a daily basis will have a high value compared to other product.

In India, there are many different types of price indices and one of them is the Whole Sale Price Index (WPI) which checks the changes in whole sale prices. We have many different price indices because different groups of people are affected by price variations in a different manner. For example: If you are not building a house then the price of cement may be of no importance to you. However, for a builder or a cement manufacturer, the present price structure is definitely relevant to him.

As mentioned above, the inflation rate is mostly calculated on the basis of Whole Sale Price Index (WPI). Hence, a given annual inflation rate for a particular week indicates how much the average level of prices of the commodities tracked by Whole Sale Price Index (WPI) has risen, compared to the corresponding week , a year. It is important to understand the fact that when the inflation rate goes down, it does not mean that prices are actually declining. It only indicates that the rate at which prices are going up has slowed down to a certain extent.

During inflation, the government takes certain steps. They are as follows:

1. The government prohibits exports of rice, wheat, pulses and other food articles in order to satisfy the domestic requirements.
2. Also, the import duty on edible oils and other food items is brought down to zero.
3. The government also tries to avoid export of steel, iron ores and cement by imposing export duty ranging from 5% to 15%.
4. All duty draw back on export of metals and cement are also withdrawn.

However, one must be aware of the fact that although the government takes certain measures curb inflation yet they may not be sufficient enough to tackle inflation totally.