What is Inflation and how it affects us?

Inflation refers to the decrease in the buying power of a Nation’s Currency. In simple words, it is the measure of the rise in the value of similar goods and services compared to a previous time. As the prices rise, the amount of goods and services you can buy from a given amount of Currency reduces thus causing a Currency value fall which is indicated by Inflation. It is an important measure in a country’s Economy because it forms a major basis for the Government’s Monetary and Fiscal Policy and changes thereof.

In India, there are two primary measures of Inflation are Consumer Price Index (CPI) which indicates the retail price Inflation for consumers and the Wholesale Price Index (WPI) which indicates Inflation at the Business Level. Inflation is indicated as a percentage and generally compared to the same month in the previous year. For the common man, CPI is the important Inflation to track because it indicates the cost of living in the country as it takes into account the food and services cost also. Inflation is indicated as a percentage and generally compared to the previous year.

Let’s understand Inflation through a simple example. Assume that in 1975, the cost of onion was Rs.1 per kg and with a ten-rupee note you could buy 10kgs of onion. Twenty-five years later, in 2000, the cost of onion was Rs. 10 per kg. In 2000, with the same ten-rupee note, you could buy only 1kg onion. That rise in prices is denoted by inflation over 25 years. If prices of a basket of goods and services fall, it is known as deflation or Negative Inflation.

The Reserve Bank of India (RBI)  & Government sets the Inflation tolerance limits to Indicate price instability and weak Monetary Policy to bring about necessary changes for stability. The Inflation tolerance limits are set by the Government of India, every 5 years, in discussion with the Reserve Bank. For the period of 2016-2021, the Inflation upper and lower tolerance limits are set as 6% and 2% respectively. The failure to maintain Inflation is indicated if the upper or lower Inflation tolerance limit is breached for three consecutive quarters.

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