what is price inflation?

What is Price Inflation?

Learn about Price Inflation with Kader Khan
Sanam 1997

The scene you just saw shows Khan Bahadur (Played by Kader Khan) standing in a car without an engine. He complains about the country’s economic state. He mentions how the rising petrol prices have crippled the country.

This blog, Learning Perspectives will explore the meaning of Price Inflation.

What is Price inflation?

The rise in petrol prices leads to lower margins for transportation and increases the cost of daily consumables over a period of time. This is referred to as price inflation. Price Inflation is an increase in the prices of goods and services in an economy.

Inflation occurs due to many factors, this includes the economic environment of the country, financial health, and interest rates. Demand-pull inflation occurs when total spending is higher than the supply in the market. In other words, prices are pulled up by the pressure from the buyers’ total expenditure.

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Understand Price Inflation with a Video

Cost-push Inflation occurs when there is an increase in the cost of production irrespective of the demand conditions. Costs increase by the labor, Price rise of raw materials, and increase in construction equipment build upward pressure on the price.

Consumer Price Index:

Inflation is measured through a tool called the consumer price index (CPI). This index measures the changes in the average prices of goods. These changes are compared through time. These goods include only consumer goods. It excludes goods purchased by businesses and the government. The consumer price index is sometimes called the cost of living index too.

The formula for Consumer Price Index =

Cost of the basket in CY/ Cost of the basket in base year*100

A basket is defined as the goods that the country considers essential to calculate this index. The most recent report of CPI in India by the Ministry of Statistics and Program Implementation indicates 25 goods in the goods basket. 2012 is the base year for the year 2022.

Below is the provisional June 2022 report given by the Government of India. The annual inflation rate is 7.01% based on CPI as of June 2022.

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