Investment Basics

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Investment Basics

What is Inflation ?

Have you heard of this killer called Inflation ? Everybody is talking of price rise and how things are becoming so difficult to sustain for the common man.

1st let us understand what do we mean by inflation ?

You may say it means everything is expensive or the price of goods and services are increasing.

  • “An increase in the price you pay or a decline in the purchasing power of money”

It may be caused by an increase in the volume of paper money issued or when the supply of goods fails to meet the demand.

For example : if you had Rs 100 and you could buy 5 kilos of tomatoes then after a certain period ,let’s say about 2 years later with the same Rs 100 you would be able to buy about 3-4 kilos of tomatoes.

So what has happened in 2 years ?  The value of the rupee has diminished.

This will happen year on year and would mean you would have to spend more on the same goods and services which you bought 2 years ago.

There are 2 types of inflation prevailing in the Indian market :

  1. WPI – Wholesale Price Index

Definition: Wholesale Price Index (WPI) represents the price of goods at a wholesale stage i.e. goods that are sold in bulk and traded between organizations instead of consumers. WPI is used as a measure of inflation in some economies.

WPI is an easy and convenient method to calculate inflation. Inflation rate is the difference between WPI calculated at the beginning and the end of a year. The percentage increase in WPI over a year gives the rate of inflation for that year.

Source : Economic Times

  1. CPI  : Consumer Price Index

Definition: A comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy is called consumer price index.

Inflation is measured using CPI. The percentage change in this index over a period of time gives the amount of inflation over that specific period, i.e. the increase in prices of a representative basket of goods consumed.

Source : Economic Times

We are affected as consumers so if the CPI keeps on increasing it directly affects us at various levels – as investors, as employees and employers and finally as citizens who are tax payers in some form or the other.

We will see next time what has been the trend in the last 2 years or in the recent past….so on that basis we can see what the near future holds for us and our next  generation.

Till then…..

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