Inflation is the sustained increase in the general price level in an economy.Since the beginning of 2010, prices have been steadily increasing in India. But in Dec 2012,the headline inflation finally showed reduction (7.18% headline inflation) leaving some room for RBI to cut interest rates.Inflation impacts every citizen of a country. It also leads to reduction in investors’ confidence in the economy due to price uncertainty. So, RBI strives to maintain a moderate level of inflation that is good for the economy. It is important to note that low level of inflation is not necessarily good. Federal Reserve of US ,under Alan Greenspan, had focused so much on inflation that it resulted in low interest rates for far too long and creation of the Housing Bubble which was the main trigger for the financial recession.
Inflation mainly happens as a result of an increase in demand without a corresponding increase in supply. Before this decade, external factors such as oil price hike,gulf crisis,wars etc used to lead to inflation .We examine the various causes of inflationary pressures in India:-
1)Deregulation of administered prices such as petrol,diesel etc and other measures such as caps on number of subsidised cylinders a household can use leads to upward movement in the prices.
2)Supply shocks which happen due to adverse monsoon conditions leads to increase in demand in agricultural sector which can spillover to other sectors.
3)Increase of indirect taxes in the recent budget of 2012.
4)Increase in the prices of crude oil imports which leads to price rise in all those industries which use it as raw material. eg-power,petroleum products.
5)Increase in money in the hands of people due to increased Government spending in schemes like NREGA.
6)Increase in population which leads to increase in demand.
In India, we usually measure inflation through wholesale price index which is prepared by Central Statistical Organization.It includes all the important goods traded in the wholesale market.
For those uninitiated these are the terms usually associated with inflation:
Headline Inflation-It measures total inflation in the economy.
Core inflation-It measures total inflation excluding areas like food and energy sector because they are prone to sudden change in its prices.
