INFLATION

Presented by Mehul Chauhan:

2102931021
Table
of
Contents

 What Is Inflation?
 Causes of Inflation
 Types of Price Indexes
 The Inflation Rate Formula &
How to Calculate It
 What is Inflation?

• Inflation is the rate at which the value of a currency is falling and, consequently, the
general level of prices for goods and services is rising.
• Inflation 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 (CPI) , the
Wholesale Price Index (WPI), the Producer Price Index (PPI).
• Inflation can be viewed positively or negatively depending on the individual viewpoint
and rate of change.
• Those with tangible assets, like property or stocked commodities, may like to see some
inflation as that raises the value of their assets.
In Hungary, in the year 1941, inflation reached 1,50,000% a day. That means
an apple that cost you 10paisa on Monday would have cost ₹150 on Tuesday.
Now imagine, if you lived during that time and had all your money saved or
stashed under your mattress, your money value would be wiped out in a single
day. While such occurrences are relatively rare, the rate of inflation keeps
changing from time to time.
And the only escape from this inflation trap is investing. To battle inflation, the
ideal thing is to start investing. Inflation can be both good and bad, depending
on where you invest. There are multiple investing vehicles, Let us say you have
invested in Fixed Income assets such as FDs/RDs for a return of ~7.5% per
annum for ten years. The returns after tax would be ~5.5%, while the average
inflation rate for the past ten years is ~6%. Your money value would have
diminished by 0.5%. While when you invest in inflation hedges like Real
Estate, Equities, Gold and Cryptocurrencies, they have the potential to give
returns that far exceed the inflation rate. 
 • The economywide increase in the prices of goods and services
over time is called inflation.

• Inflation diminishes the purchasing power of money, which is

why ₹140 could purchase a plane ticket 60 years ago but isn’t
even sufficient to buy a decent movie ticket today. 

Inflation
And
Your Investments
The real problem is that
though income and
prices do increase over
time, they do not grow
at the same rate.
 WHOLESALE ONION
MARKET

THE SADAR
BAZAR (DELHI)
 The Wholesale price index (WPI)

The Wholesale Price Index (WPI) reflects changes in the average prices of goods at
the wholesale level — that is, commodities sold in bulk and traded between businesses
or entities rather than goods bought by consumers. There are certain limitations in
using WPI as a measure for inflation, as WPI does not consider the price of services,
and it does not reflect the consumer price situation in the country.
 
WPI is released by the Economic Advisor in the Ministry of Commerce and Industry.
The purpose of WPI is to inspect movement in prices of goods that reflect supply and
demand in industry, construction and manufacturing. The index basket of WPI
categorizes commodities under three groups — primary articles, fuel and power &
manufactured products.
 
 The Inflation Rate Formula & How to
Calculate It

 In order to calculate the inflation rate you have to use the inflation rate formula.
This is a simple formula that allows you to see the percentage of increase or
decrease in cost between given years. Once you understand the inflation rate, it’s
easier to create a budget.
 Example

 1. You want to find out the rate of inflation for bananas in March 2014 compared to July 2001. If the price of a
pound of bananas was $0.52 in July 2001 and in March 2014 it was $0.59, the calculations would be as follows:
 Start date: July 2001. Price: $0.52 = A
 End date: March 2014. Price: $0.59 = B
 Inflation Rate = ((B – A) / A) x 100
 Inflation Rate = ((0.59 – 0.52) / 0.52) x 100
 Inflation Rate = (0.07) / 0.52) x 100
 Inflation Rate = (0.07) / 0.52) x 100
 Inflation Rate = (0.1346) x 100
 Inflation Rate = 13.46%
 Formula of calculating WPI

The WPI is calculated using the Laspeyres formula, which measures the change in the cost of purchasing
the same basket of items in the current period as was purchased in a specified earlier period.
WPI=  (Current Price / Base Period Price) × 100
Let us now understand this WPI formula with the help of an example. Suppose, the total price of goods in
the current year (2016) is INR 3,500. To calculate the change in prices, we consider 2010 as the Base Year.
The total price of goods in the base year is INR 2,000. Now, with the help of this formula, we will calculate
the WPI index,
WPI = (3,500/2,000) × 100; WPI=  (17.5/10) × 100
;WPI= 175
Since the base year's WPI is considered to be 100 on the scale, the difference between the current year's
WPI and the base year's WPI is 75% (175-100). Thus, 75% is the WPI for our current year (2016).