Inflation is one of the perils of a growing economy. Many economists argue that as long as it stays low and predictable, inflation can help drive economic growth. However, a high inflation rate can lead to low consumer purchasing power, which slows economic growth.
Calculating the inflation rate can help measure the overall price level changes in the country over time. Several factors can contribute to inflation. In this article, we will discuss all of them and explain how inflation is calculated in India.
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Inflation is the rise in the price of goods and services, which contributes to a drop in the purchasing power of people. It comes from the Latin word, 'inflate', which means to "blow up'. There are several causes of inflation. It can be caused when the demand for goods and services exceeds the supply. It can also be caused due to economic factors, such as increased production costs, higher taxes, and reduced savings, among other things.
Inflation is generally calculated on the basis of two indices:
CPI replaced WPI as the primary measure of inflation in India in 2013. At present, India only uses CPI as an inflation index.
CPI considers the weighted average value of a basket of 299 commodities. The change in CPI for a determined duration is considered to be the inflation for the said period. For instance, a pack of 100 grams of rice cost Rs 50 in 2019. The exact quantity, i.e., 100 grams, will cost Rs 80 in 2023. Hence, the inflation here is Rs 30.
The inflation rate can be calculated by using the following formula:
Inflation = ((CPI x+1 – CPIx)/ CPIx))*100
Here, CPIx is the initial consumer price of the index.
In order to use the above formula, you need to know how to calculate CPI. Here is the formula for the same:
CPI = (Cost of Fixed Basket of Goods and Services in Current Year/ Cost of Fixed Basket of Goods and Services in Base Year) *100
CPI is calculated and published by the Ministry of Statistics and Programme Implementation (MOSPI) for the entire country and for individual states.
An inflation calculator is an online tool that helps you determine the future cost of goods and services based on the current inflation rate. It takes into consideration the following factors:
All you need to do is enter the current price of the product or service you are interested in. Enter the inflation rate and the number of years, and the calculator will display the future cost of the product.
For example, if a phone costs Rs 10,000 today. With a 6% inflation rate per annum, it will cost Rs 13,382 in five years.
You can unlock the following advantages by using the inflation calculator:
Knowing how to calculate the inflation rate is essential to understand the concept of inflation and the factors that impact it. But you need not calculate the rate yourself. The annual inflation rate is released by the government every year. Having said that, you can use the inflation calculator to determine how the prevailing inflation rate in the country directly impacts you and your future goals. Motilal Oswal's Inflation Calculator is a convenient and fuss-free online tool that can help you plan and align your goals to the rising inflation rate.
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