INFLATION AND WPI - ECONOMY
News: Why
inflation and WPI is down, but not (all) prices
What's in the news?
● The
headline retail inflation rate fell to a
25-month low in May and the wholesale price index (WPI) is now deep in the
red, but groceries and household items continue to appear expensive to most
Indians.
Key takeaways:
● While
some of the decline in year-on-year inflation rates is statistical, prices of
cereals, milk, spices, prepared meals, snacks, and sweets, as well as the costs
of education, personal care items, and household goods and services continue to
pinch consumers’ pockets.
Inflation:
● Inflation
is defined as a situation where there is sustained, unchecked increase in the general price level and a fall in the
purchasing power of money.
Drivers behind Inflation:
There
are four main drivers behind inflation such as
1. Cost-push Inflation:
● Cost-push
inflation is the decrease in the aggregate supply of goods and services
stemming from an increase in the cost of
production whereas demand-pull inflation is the increase in aggregate demand.
2. Demand-pull Inflation:
● Demand-pull
inflation can be caused by an expanding economy, increased government spending,
or overseas growth.
3. Increase in the money supply of an economy:
● It
leads to the depreciation of local
exchange rates.
● As
a result, the purchasing of imports decreases while the buying of exports by
foreigners increases. This raises the overall level of aggregate demand.
4. Decrease in the demand for money:
● If
a government reduces taxes, households are left with more disposable income in
their pockets and hence increase the overall demand.
Further Reference: WPI and CPI