consumer consumes while the WPI is a basket particular to the wholesale market. Incalculating average price level on the basis of CPI more weightage is given to fooditem in WPI these items have low weightage. IN WPI services are not included inCPI services like education fee, doctor’s fee, personal care fee etc. are included. Incae of WPI base year is 1993-94 in case of CPI base year is 1982.HEADLINE INFLATIONWeekly inflation data reported in newpapers.CORE INFLATION
Core inflation is a measure of inflation which excludes certain items that face volatile price movements e.g. food products and energy.
Causes Of Inflation
Inflation may be caused by reasons in the real sector or the monetary sector of theeconomy. In the real sector inflation may result either from the reasons operatingon the demand side ( demand pull) of the economy or reasons operating on thesupply side ( reasons which operate through cost) of the economy. Wage spiral,inflationary expectations, mark-up are some other reasons which may happenthrough the supply side.Monetary sector inflation may be caused by rise increase in the supply of money.
Demand-pull inflation refers to the idea that the economy actual demandsmore goods and services than available. This shortage of supply enablessellers to raise prices until an equilibrium is put in place between supply anddemand.
The cost-push ( cost push inflation is called commodity inflation) theory , alsoknown as "supply shock inflation", suggests that shortages or shocks to theavailable supply of a certain good or product will cause a ripple effect throughthe economy by raising prices through the supply chain from the producer tothe consumer. You can readily see this in oil markets. When OPEC reduces oilsupply, prices are artificially driven up and result in higher prices at the pump.
3. Inflationary Expectation – Milton Freidman emphasized the important of inflationary expectation in creating more inflation. The theory works like this. In thelate 1960s, Friedman argued that if the price rise was expected, unions would havedemanded higher wages, so wages and prices would go up in unison. The effect of inflationary expectation hen in the 1970s, the nightmare scenario that Friedman’stheory seemed to predict, came true. Inflation expectations were so deeplyembedded, that in order to give a boost to jobs, prices had to rise by more thannormal. This extra rise then became expected – and an upward spiral of ever-rising prices occurred, and so sophisticated did our expectations become, thatunemployment actually started to rise. It was called stagflation. on inflation canwork in various other ways also.