Inflation is a function of supply and demand of money, defined as sustained increase in prices of services and goods over a period. It is one of the most misunderstood economic phenomenon which are difficult to forecast and control. As the price of good increases, the purchasing power and the value of currency decreases. Inflation may affect economy in both positive and negative ways. High inflation rates can make it difficult for the companies to plan their budget in each financial year as it becomes difficult to forecast prices going forward. Another downside of inflation is that it widens the gap between people with fixed income (those receiving social benefits) and the people with variable income. If prices keep falling, consumers will wait for a better deal which leads to less spending and demand, less production and stumbling economy. Per the well know ‘Philips curve’, moderate inflation also keeps unemployment in check.
Measuring Inflation
In India, Inflation is measured by two indices, namely, Consumer Price Index (CPI) and Wholesale Price Index (WPI). CPI measures the changes in the price level of a market basket of consumer goods and services. Price data is collected from a sample of goods and services from a fixed sample of retail outlets from various places. After taking price data, we take a weighted data wherein we give weights based upon the expenditure share of that good against total expenditure. Thus, in this way we take weighted average of all the major