Know about Inflation

What is Inflation?

The inflation rate refers to the percentage by which the general price level increases over a given period of time. Inflation is a metric used to quantify the increase in the overall cost of a specific collection of goods and services within a given timeframe, typically one year.

In economics, inflation is defined as the increase in the overall price level of goods and services in an economy, relative to a specific benchmark of purchasing power.

Measures of Inflation

The measurement of inflation is facilitated by utilising the price index level. Various measures of inflation are used depending on the purpose of analysis, the focus on specific sectors, or policy objectives. The common measures include:

GDP Deflator

Consumer Price Index (CPI)

Producer Price Index (PPI)

Wholesale Price Index (WPI)

Cost-of-Living Index (COLI)

Core Inflation

Comparisons of the Measures of Inflation

Aspects	GDP Deflator	CPI	PPI	WPI
Objectives	Overall price changes in the economy	Retail prices of goods and services consumed by households	Selling prices received by producers	Wholesale prices of goods
Scope	Covers all goods and services in GDP	Limited to a fixed basket of goods and services	Includes goods and services produced domestically	Limited to goods at the wholesale level
Volatility	Moderate, varies with broad economic factors	More stable, but affected by food and energy prices	Relatively stable, as it reflects producer trends	Highly volatile due to global commodity prices
Frequency	Calculated quarterly with GDP data	Published monthly in most countries	Published monthly/quarterly	Published monthly
Granularity	Lacks category-specific data	Categorized into rural, urban, and combined indices	Provides detailed producer-level data	Focus on commodity groups
Exclusions/ Inclusions	Excludes imports; includes all domestically produced items	Excludes wholesale and producer-level costs	Excludes taxes and distribution costs	Excludes services
Relevance	Measures overall inflation affecting economic growth	Reflects cost of living	Monitors producer-level price dynamics	Tracks supply-side inflation
Policy Implications	Useful for understanding macroeconomic inflation	Central banks use it for setting inflation targets	Helps in assessing producer margins and profitability	Often used for industrial and trade policy

Conclusion

Each measure provides unique insights into inflationary trends and is suited to different purposes. Policymakers and economists often analyze these measures together for a comprehensive understanding of inflation, enabling more effective decision-making.

Know More:

GDP Deflator

Consumer Price Index (CPI)

Producer Price Index (PPI)

Wholesale Price Index (WPI)

Cost-of-Living Index (COLI)

Core Inflation