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How to Calculate Inflation Rate In India

28 Jun 2023

Introduction:

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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What is inflation?

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. 

How is inflation calculated?

Inflation is generally calculated on the basis of two indices:

  • Consumer Price Index (CPI): CPI measures price changes on the retail level and shows the consumer's cost of living. 
  • Wholesale Price Index (WPI): WPI measures price changes on the wholesale level and depicts the costs incurred by businesses when purchasing goods and services from other companies.

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.  

How to calculate the inflation rate?

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.

Inflation calculator 

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:

  • The present price of a good or service
  • Inflation rate
  • Number of years

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. 

What are the benefits of using the inflation calculator?

You can unlock the following advantages by using the inflation calculator:

  • Helps you plan your purchases: You can use the inflation calculator to determine the cost of products and services in the future and plan for your future goals with better precision. It can help you with small goals like purchasing a car and bigger goals like buying a house or planning for your child's higher education.
  • Helps you invest better: You can use the inflation calculator to ascertain the future value of your investment capital. It can help you look for investments that can offer inflation-beating returns and grow your money in tandem with inflation. 
  • Saves time and money: The calculator is a free tool. You can use it anytime and anywhere. It is quick and easy and can help you save money in the long term by planning well and being prepared for the likely increase in prices in the future. 

To sum it up

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. 

 

Related Articles:  A Beginners Guide to Calculate Future Value of Money | What are The Uses of Lumpsum Calculator | Mastering Gratuity Calculation: The Step-by-Step Formula | How to Calculate Gratuity for Government Employee | How to Calculate Gratuity for Private Sector Employees | What is an SWP Calculator and How Does It Work?

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