BUSINESS CONTEXT IN

INFLATION CONCEPT
BY
BERIN B
KARTHICCK
SREE TAMIL
INFLATION
• Inflation is the rate at which prices for goods and services rise.
• It is sometimes classified into three types:
• demand-pull inflation,
• cost-push inflation, and
• built-in inflation.
• The most commonly used inflation indexes are the Consumer Price
Index and the Wholesale Price Index.
• Inflation can be viewed positively or negatively
Types of Price Indexes:
The Consumer Price Index (CPI)

Weighted average – prices of primary consumer goods and services.

Retail prices are taken - Transportation, food, and medical care
Changes in CPI corresponds to the cost of living

The Wholesale Price Index (WPI)

Changes in the price of goods in the stages before the retail level

wholesale level – it includes mostly raw material

Producer price Index(PPI) – changes in the prices w.r.t seller

• Formula for finding inflation

• Percent Inflation Rate = (Final CPI Index Value/Initial CPI Value) x 100
Current CPI Inflation rate in India:
India's retail inflation eases to 6.71% in July

 A slowdown was seen in cost of food (6.75% vs 7.56% in

June); transportation & communication (5.55% vs 6.9%)
and health (5.45% vs 5.47%)
 Impact of Inflation on Business:
Increase in cost of materials
Higher wages to employees

Uncertainty and volatility – creates doubts

while investing.

With rising interest rates increases borrowing

costs – again creates doubt from investing

Difficulty in expansion of business as borrowing

costs are higher.

Reduces the cost of existing debt.

Business with low competition is not affected

but a business with higher competition is most
affected.
The Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is mandated to keep inflation at 4 per cent,
plus-minus 2 per cent.

RBI ways to control inflation:

• Increasing bank rates, repo rates, cash reserve ratio, buying dollars,
regulating money supply and availability of credit.
• These all reduces the money supply in the market, thus reducing the
demand.
• Supplies can be strengthened to reduce the Cost-push inflation – providing
subsidies and technological expertise
Control Measures
• Repo rate
• Reverse repo rate