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Inflation rate is a measure of inflation, which means the percentage rate of change of a price index, such as the Consumer Price Index (CPI) and the decrease in the purchasing power of money is approximately equal to this rate. It is used to calculate the real interest rate, as well as increase in real wages, and official measurements of this rate act as input variables to COLA adjustments and Inflation derivatives prices. Inflation rate is usually expressed in annualized terms, though the measurement periods are generally different from one year. Inflation rates are often given in seasonally adjusted terms, excluding systematic quarter-to-quarter variation.

Initially, Inflation originated with the debasement of the currency meaning that gold coins were collected by the government i.e. usually the king or the ruler of the region melted down, mixed with other metals (often lead) and reissued them at the same nominal value. As a result the total nominal value of coins in circulation and the money supply in the economy increased. However, the ‘real value' of each unit of currency, i.e. gold coin decreased as it was no longer pure gold. This led to an increase in nominal prices, because of which a consumer had to pay more mixed coins in exchange for goods and services than they previously paid in terms of pure gold coins. By the 19th century, the word inflation started to appear as a mirror image to the action of increasing the amount of currency units by the central bank.

In Classical Political economy, inflation simply meant increasing the money supply and deflation meant decreasing it. Economists from some schools of economic thought still follow it. Classical political economists from Hume to Ricardo distinguished between them and debated the cause and effect relationship: - for example the Balloonists argued that the Bank of England had over issued banknotes (increased the money supply) and caused 'the depreciation of banknotes'. That is it created inflation. In today‘s world increase and decrease in the money supply mainly results from actions by central banks. The effects of increasing the money supply are magnified by credit expansion, as a result of the fractional-reserve banking system employed in most economic and financial systems in the world.

In contemporary economic terminology, these will be referred to as expansionary and contractionary monetary policies. Mainstream economists believe that inflation is a measure of changes in the general price level. The difference is that Austrian economists claim that inflation is the result of producing more units of money, whereas the mainstream economists consider inflation as the effect rather than the cause. Maximum schools of economics agree that changes in the money supply relative to the level of economic activity affects the price levels, there is no direct relation with the quantity of money, for example- changes in price levels are affected by the velocity of money, and inflation can occur with a substantial lag between the increase in the quantity of money and by the rise in the general price level.


The Indian economy has shown a remarkable growth after the adoption of liberalization policy. The opening up of the Indian economy in the early 1990s led to increase in industrial output and simultaneously raised the Inflation Rate in India. There was an immense pressure on the inflation rate due to the stupendous growth rate of employment and industrial output. The main concern of the Reserve Bank of India (the central bank) and the Ministry of Finance, Government of India was the prevalent and intermittent rise of the inflation rate. Increasing inflation rate could be detrimental to the projected growth of Indian economy. Thus, the Reserve Bank of India was putting checks and measures in various policies so as to put a stop to the rising inflation.

The Indian business community and the general public were assured by the central bank that the inflationary rise was harmless but still certain apprehensions existed among them. The pricing disparity of agricultural products between the producer and end-consumer was contributing to the increasing Inflation Rate. Apart from this the steep rise of prices of food products, manufacturing products, and necessities had also catapulted the Inflation Rate. As a result of all this, the Wholesale Prices Index (WPI) of India reached 6.1% and the Cash Reserve Ratio touched 5.5% on 6th January, 2007. The Reserve Bank of India gave top priority to price stability in its recently drafted monetary policy so as to arrest the panic and discomfort amongst the Indian business circles. It also aims to sustain the stupendous rate of economic growth of India. The Reserve Bank of India raised the Cash Reserve Ratio and used it as a tool to arrest the increasing Inflation Rate. Rationalizing the pricing disparity between the producer and the consumer is the only solution to this problem. Only this will ensure inflation stabilization and thus sustainable economic growth of India.

From the beginning of FY2008 the Indian economy faced a rise in the prices of vegetables, pulses and other basic food stuffs. All this was accompanied with sharp rise in the prices when the annual policy statement for 2008-09 was unveiled on April 29. Inflation increased steadily during the year, reaching 8.75% by the end of May and in June when this jumped to 11% then there was an alarming increase in the prices. There were many reasons for it but one of the main driving forces was reduction in government fuel subsidies, which lifted gasoline prices by an average 10%. Indeed, by July 2008, the key Indian Inflation Rate i.e. the Wholesale Price Index touched the mark of 12.6%, highest rate in past 16 years of the Indian history. This was almost three times the RBI‘s target of 4.1% and almost doubled as compared to last year. This continuous rise slipped back to 12.4% by mid-August.

Since the beginning of 2008 combination of various internal and external factors led to steep domestic inflation and the resultant steps taken to control it in were slowing the pace of expansion. These factors included the marked rise in the international prices of oil, food, and metals, moderating the rate of capital inflows, worsening current and fiscal account deficits, increasing cost of funds, minor depreciation of the Indian rupee against the dollar, and slow growth in industrial economies. The Indian economy was at a critical juncture where policies to contain inflation and ensure macroeconomic stabilization have taken center stage. In the first quarter of FY2008 (i.e. April-June), growth rate of GDP slowed down to 7.9% from 9.2% in the corresponding prior-year quarter, for the slowest expansion in three and a half years. The most remarkable decline was in industry where growth rate fell to 6.9% this was mainly because of cutting in the manufacturing growth rate to 5.6%. The slowdown was widened when agriculture and services sector showed a negligible growth of 1.4% and 0.9% points, below their performances of the year-earlier quarter. Over the medium term, the main objective of the government was to bring down inflation to 3%. The Repo and Reverse Repo Rates remained unchanged whereas Cash Reserve Ratio (CRR) was increased by 0.25 percentage points.

A survey of manufacturing companies was conducted by the Reserve Bank of India in June 2008 which indicated a moderation in business optimism. This was corroborated by the composite business optimism index for July-September 2008 that was prepared by Dun and Bradstreet, which shows a decline of 11.2% as compared to the previous quarter. In July, the BBB- rating on foreign currency debt was confirmed but downgraded the view for India‘s long-term local currency debt from stable to negative, with a noticeable deterioration in the fiscal position Growth of the broad money supply (M3) had to be moderated in the range of 16.5 to 17 per cent. While deposits were scheduled to rise by 17% and non-food credit disbursements by banks will grow at a slow rate of 20% as compared to 22.5% in 2007-08. Credit disbursed by banks last year was less as compared to the previous period. Bank credit had grown by a scorching 30% every year for consecutively three years beginning in 2004-05.

The combined budget deficits of the central and state governments have been substantially reduced over the past 5 years. This reflected sincere efforts by the government to adhere to fiscal responsibility legislation. For FY2008, the central Government‘s deficit is budgeted at 2.5% of GDP and the states‘at 2.1% (4.6% of GDP on a consolidated basis). The major factors that strengthen the appreciable fiscal consolidation from the base were a wider tax base supported by a buoyant economy and improved compliance. Two main situations that must be overcome before achieving the deficit targets for the FY2008 are: a slowing economy that may limit the revenue buoyancy seen in recent years and continuous pressure by the Central Government to raise the salaries of its employees by 21% (about 0.3% of GDP) in response to recommendations of the Sixth Central Pay Commission. Similar wage increases were announced immediately by half a dozen states and others were following the suit. On the other hand provision for these salary increases was not budgeted.


India's inflation rate based on wholesale prices rose marginally to minus 1.53 percent for the week ended August 8 against (-) 1.74 per cent in the previous week. An official release issued here by the commerce ministry also showed that food articles index surged 10.5 percent compared with a year ago as a weak monsoon hit crops.

It was the second week in a row that the food price index saw growth of at least 10 percent. Inflation in the corresponding week in the previous year was 12.82 per cent. However, the price index for fuel and power saw a marginal decline to 338.2 from 338.3 the week before.

India inflation turned negative for the week ended June 6 for the first time since the new wholesale price index series started in 1995. It last turned negative in 1977. Negative inflation implies that the average wholesale price level was lower during a given week, than it was in the corresponding week a year ago. It does not necessarily reflect retail prices. The final data for the week ended June 13 showed that the revised annual inflation rate actually stood at minus 1.14 percent.

New Delhi, March 26 (IANS) India's annual rate of inflation declined for the eighth straight week and fell to another historic low of 0.27 percent for the week ended March 14, against 0.44 percent for the week before, official data showed Thursday. The drop was mainly on account of a relatively higher rise in the official wholesale price index during the corresponding week of last year, as between March 7 and 14, the index rose 0.1 percent, data released by the commerce and industry ministry showed. Among the three main commodity groups, the index for the manufactured products rose 0.2 percent, while that for primary articles registered a small increase. Economists, who have already warned of a deflation in the Indian economy, explain that lower inflation rate does not necessarily mean that prices have fallen. Lower inflation rate only means the rate of rise in prices has come down, not the actual prices. Deflation is a decline in the general price level. It is caused by factors such as low money supply and credit, and a curb in spending by households, industry or government. The lower demand during deflation often leads to a rise in unemployment levels.


In Pakistan, general price level is persistently rising since partition of the subcontinent. Dearness is due to declining economic growth, expansionary policies, output setbacks, higher taxes and a depreciation of Pak rupee. Generally the whole world is facing the problem of price like, but in Pakistan it has become a severe problem with more than 11% inflation rate per annum, which is the highest in the world. It is considered that inflation rate from 2 to 3% is necessary for the proper growth of economy but if it exceeds from this limit, then it becomes a problem.

1. Major cause of increase in the price level is an increase in currency or credit money. Increase in stock of money induces people to demand more and more of goods and services. The policy of deficit financing has led to increase the quantity of money in the country particularly after 1972. In January 1993 currency in circulation was Rs.166 billion, which has gone up to Rs.834 billion in June, 2007. At the end of the fiscal year 2007-08 it is more than 1050 billion.

2. To control this reason of price like, Govt. must follow stringent monetary and fiscal policies, as a preliminary step, central bank should adopt tight monetary policy to reduce currency expenditures should be reduced.

On July 5 the inflation rate has jumped over 31 per cent during the last one week. This is first instance of inflation jumping to a record high in the history of Pakistan, lending urgency to the need for Government intervention to hold millions of people falling into poverty trap.

It has been found that the prices of goods and services for the lowest income group increased as much as 31.6 per cent during the week ended on July 3 as compared to the same week of the last year. Which are based on Sensitive Price index (SPI) showed that out of surveyed 53 items, the prices of 45 products mainly essential food commodities increased during the last week (June 27 to July 3) as compared to the same week of the last year. Most of the economists say the government is partly responsible for current wave of inflation. They say other than ‘imported inflation', caused by high-energy prices; the ‘homegrown inflation' is also becoming problematic.

ISLAMABAD (Pakistan) -

Inflation rate up 10.66pc during first quarter, Inflation remains in double digits in the first quarter (July-September) of current fiscal year 2009-10 despite State Bank of Pakistan (SBP) pursued tight monetary policy in the aforementioned period to arrest it. The SBP in its latest monetary policy has maintained mark up rate at 13 percent to control the soaring inflation, which enhanced by 10.66 percent in July-September 2009.

The government in the current federal budget targeted to bring inflation down to a single digit in the year 2009. The economists believed that the government would achieve the target before December this year, as the prices of petroleum products are dipping in international market. Meanwhile, the inflation based on Consumer Price Index (CPI) surged by 10.66 percent in the first three months of the current financial year against the same period of last fiscal year, Federal Bureau of Statistics reported on Monday.

The inflation measured by Wholesale Price Index (WPI) enhanced by 0.49 percent in the first quarter of the current fiscal year, while inflation based on Sensitive Price Indicator (SPI) was recorded at 9.29 percent in the under reviewed period, the data further revealed.

The break-up of CPI based on general inflation (10.66 percent in September 2009) illustrated that apart from 10.02 percent food inflation, apparel, textile and footwear inflation soared by 5.57 percent in September 2009 over the same period of the last year. Similarly, house rents increased by 16.77 percent.

Inflation edges up by 11.3% remaining in double digits, the inflation increased by 11.3% during February over the same period of the last year because of surge in the prices of essential kitchen items. The official statistics showed that food and beverage inflation soared by 16.05% during February 2008 over a year ago, resultantly the general inflation measured by Consumer Price Index (CPI) registered a growth of 11.25%.

A comparative look on previous fiscal year revealed that during the corresponding period of financial year 2006-07 the general inflation based on CPI was 7.39 per cent as compared to the fiscal year 2005-06.

During the period under review the inflation in the wholesale market turned to be worst as compared to the retail market. The general inflation measured by Wholesale Price Index (WPI) skyrocketed to 16.36%. A year ago the WPI inflation was only 5.09%. The food inflation in the wholesale market recorded at 18.28% during February 2008 as against the same period of the last year. The government has projected inflation at 6.5% for the financial year 2008. The Federal Bureau of Statistics data depicted that the inflation soared to 8.9% during first eight months (July-February) of the current financial year. Similarly, in the given period the inflation based on WPI recorded at 11.68% and SPI stood at 11.68%.

The break-up of CPI based general inflation (11.25%) illustrated that apart from 16.05 per cent food inflation, apparel, textile and footwear inflation soared by 6.66 per cent in February 2008 over the same period of last fiscal year. Similarly, the house rent increased by 9.96% and transportation and communication prices accelerated by 2.97% mainly because of increase in oil prices. The fuel and lightening prices augmented by 6.17%, household, furniture and equipment 6.35%, recreation and entertainment 0.74%, education 3.43%, cleaning, laundry rates swelled by 13.04% and Medicare prices shot up by 7.9% during the period under review.

The bifurcation of general inflation (16.36%) based on WPI showed that food group soared by 18.28%, raw materials 8.9%, fuel, lighting and lubricants 23.5%, manufactures 8.75% and building materials 10.85%. On month-on-month basis, the CPI based inflation ballooned by 0.49 per cent in February 2008 over January 2008. While inflation based on Sensitive Price Indicator decreased by 1.4%. The Wholesale Price Indicator ballooned by 1.24%. The main commodities in the food basket, which illustrated increase in February over January include, tomatoes 45.6 per cent, vegetables 29.2 per cent, pulse 15.8 per cent, condiments 15.3 per cent, cooking oil 8.6 per cent, vegetable ghee 6.3 per cent, fresh fruits 5.7 per cent, rice 5.3 per cent, mustard oil 4.4 per cent and readymade food 2.97 per cent.

In fuel and lightening group, kerosene prices increased by 17.2 per cent and firewood three per cent. In transport and communication group, petrol prices soared by 9.37 per cent, diesel 9.3 per cent and tyre & tubes 1.7 per cent and vehicles 1.2 per cent.

In many high inflation Asian countries, from Sri Lanka to Indonesia, political leaders buy popularity by doling out subsidies instead of building infrastructure, which are then financed with central bank credit causing very high inflation.

In Sri Lanka inflation is now at 26.2 percent, also a historic high. In the past few months the country has suppressed two inflation indices which showed higher levels of inflation.

High inflation impoverishes the poor in particular and the population in general, making it difficult for even the employed to come out of the poverty trap.

The government had spent 407 billion rupees on subsidies including 175 billion rupees on petroleum, 133 rupees on electricity, 40 billion rupees on wheat, 48 billion on textiles and fertilizers. Only 114 billion rupees were originally provided in the budget. Pakistan's foreign reserves fell from 16.5 billion dollars in October 2007 to less than 12.3 billion dollars by end April. The exchange rate has fallen by 6.4 percent from July 2007 to April 2008.

Concepts such as 'inflation targeting' where parliament limits the ability of a government to create inflation to 2 or 3 percent a year are also not widely discussed which contributes to the perpetuation of high inflation.


Inflationary pressures in any economy leads to depreciation of its domestic currency. This is what our Indian economy was facing due to the running inflation and as a result Indian rupee depreciated by about 20% since April 2008. Inflation affects-

1) Common man: Inflation affects a common man in different roles such as:

a) As a consumer:

Products such as crude oil, fertilizers, pharmaceutical products, ores and metals, or use imported components such as Personal Computers and laptops are directly imported. Due to depreciation of the Indian Rupee all these goods became very expensive. Components in computers such as processor, hard disk drive and motherboard are also imported. Products such as mouse, keyboard and monitor also witnessed an impact on their prices due to Rupee depreciation. Inflation may rise in an economy when the input costs increase.

b) As an investor:

Depreciation of rupee makes imports of various components, capital goods and raw materials more expensive. As inputs and other equipment that are imported get costlier and reducing the profit margins. Companies that import goods in bulk and those with heavy foreign currency borrowings may be marked down in the stock market as the rupee depreciates.

c) As a Wage-earner:

During inflation this class of common man suffered a lot because of two reasons-

i. Increase in wages and salaries failed to keep pace with the rising prices.

ii. Wages increased during inflation but there is always a time lag between the rise in price and increase in wages. As a result common man looses during the intervening period.

d) Export companies:

Due to depreciation of domestic currency exporters receive better prices for their goods and services when sold in foreign markets.

e) Foreign Investors:

Depreciation of Indian Rupee reduced the returns that foreign investors used to earn by investing in Indian companies. Depreciation of a currency triggered FII outflows. NRI investors, who previously invested their money in India under various deposit schemes due to high interest rates, started finding those schemes less attractive on account of rupee depreciation.

f) Country's Balance of Payments:

One of the drawbacks of depreciation of Rupee is that exports become cheap in terms of foreign currency and imports become costlier. Current account deficit widened because Indian imports basically constitutes essentials such as crude oil, natural resources and many capital goods. Depreciation of Indian Rupee made the exports more competitive globally and as a result higher exports covered up the trade deficit.

g) Farmers:

The prices of the primary commodities such as minerals, diesel oil and fuel, power light and lubricants went up significantly. This disparity affected the agricultural sector in two ways-

i. It had a restrictive effect on investments in farming and affected the production efficiency.

ii. On one hand the agricultural commodity prices were falling or stagnant and on the other hand increasing prices of agriculture inputs and other daily life commodities led to deterioration in the living standard of the farmers.

Prices paid by the consumer have impacted by the cost of living of the entire value chain, which grows on the inefficient markets and this adds to the final cost of the material. For example, high energy cost itself has contributed to the increase in the cost of inputs required for agriculture besides pushing up the marketing costs of farm products.

h) IT companies:

The IT sector is amongst the highest recruiters in the Indian economy and a depreciating rupee spells good news for the sector. Bills for Information Technology companies are basically prepared in dollars or in other foreign currencies. Depreciation of the rupee increased their realizations and bodes well for their margins. The main reason for the good performance in the second quarter of Infosys Technologies and Satyam Computers was the depreciation of the Indian Rupee. An estimate suggests that a 1 per cent depreciation in the rupee expands an IT company‘s margins by 0.30-0.40 per cent.


Majority of India‘s population lies close to the poverty line and inflation acts as a Poor Man‘s Tax‘. More than half of the income of this group is spent on food and this effect is amplified when food prices rise. The dramatic increase in inflation will have economic as well as political implications for the Congress Government, with an election due within a year. Economic growth rate in the emerging markets have slowed down but is far from over. The BRIC countries i.e. Brazil, Russia, India and China alone account for more than 3 billion people and with consumption rate increasing every year. It is expected that the high inflation rates will be there for a long period of time which is worrying news for the Indian Government. Direct regulatory measures such as the reduction in import tariffs were adopted in order relax the supply-side pressures on various agricultural commodities. While adopting the direct measures, the Government realized that the relaxation of supply-side pressures would dampen inflationary expectations by increasing supplies in the commodities market. The RBI‘s attempt to control excess liquidity in the market by raising the interest rates pushed up real-estate prices as well as the commodity prices, thus fuelling inflation. A closer look at certain commodities would reveal that the prices of sugar and wheat were managed by the Government through various market intervention mechanisms. As a result the physical market's role in effective price discovery was affected. Trade in the commodities market operated in an asymmetrical information situation from both the supply and demand sides. Hence, market operations could only benefit segments that were privy to the available information. The existing agricultural market ecosystem revolves around the traders and to some extent the producers with no say from side of consumers. Hence, at the end both consumers and producers are often at a loss. Generally, traders keep a heavy margin to compensate for the physical and financial risk involved in carrying the commodity for short as well as long term.

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