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 Rupee you own buys a smaller percentage of a good or service.

The value of a Rupee does not stay constant when there is inflation. The value of a Rupee is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 5% annually, then theoretically Rs.20 loaf of bread will cost Rs.21/- in a year. After inflation, your Rupee can’t buy the same goods it could beforehand.

There are several variations on inflation:

  • Deflation is when the general level of prices is falling. This is the opposite of inflation.
  • Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation’s monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one month!
  • Stagflation is the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil prices.

In India, inflation is calculated by taking the WPI as base. Inflation is the percentage change in the value of the Wholesale Price Index (WPI) on a year-on year basis. It effectively measures the change in the prices of a basket of goods and services in a year.

The inflation rate in India was recorded at 5.37 % in February of 2015. Inflation Rate in India averaged 8.78 % from 2012 until 2015, reaching an all-time high of 11.16 % in November of 2013 and a record low of 4.38 % in November of 2014. Inflation Rate in India is reported by the Ministry of Statistics and Programme Implementation (MOSPI), India.

Reference: Investopedia & Economics Times


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