Pt - Pt -1

Inflation Rate = x100%

Pt -1

Inflation: prices are growing

Disinflation: inflation is slowing down but still
positive
Deflation: inflation is negative and prices are
actually dropping.
Hyperinflation: Extremely high inflation
 Different price indices are:

1. Consumer price index

2. Wholesale price index

3. GDP Deflator or GDP price index

 The CPI is the price of a representative
market basket of goods relative to the price
of that same basket during a benchmark/base
year (multiplied by 100).

Cost of Market Basket in year t

CPI t = �100
Cost of Market Basket in Base year
 CPI in India
 CPI is a weighted average of prices. The weight on each price
reflects that good’s relative importance in the CPI’s basket. Note
that the weights remain fixed over time. Household survey is
conducted to find out consumption of a typical household.

The three consumer price indices are:

 CPI- for urban area (basket contains 460 items)
 CPI- for rural area (basket contains 448 items) and the
 CPI – combined
 Base for the index is 2012 ( January to December)=100.

 CPI series is published by the Central Statistics Office separately for

rural, urban and combined every month with effect from January,
2011.
 Old Series of CPI (Weights Revised Series of CPI
computed on the basis CES (Weights computed on the
Group Description 2004-05) basis CES 2011-12)
Rural Urban Combd. Rural Urban Combd

Food and beverages 56.59 35.81 47.58 54.18 36.29 45.86

Pan, tobacco and 2.72 1.34 2.13 3.26 1.36 2.38

intoxicants

Clothing and Footwear 5.36 3.91 4.73 7.36 5.57 6.53

Housing - 22.54 9.77 - 21.67 10.07

Fuel and Light 10.42 8.40 9.49 7.94 5.58 6.84

Miscellaneous 24.91 28.00 26.31 27.26 29.53 28.32

(Education, Medical care
etc.)
Total 100.00 100.00 100.00 100.00 100.00 100.00
 Like CPI, WPI is a measure of cost of a given basket of goods.

 WPI is an economy-wide index covering 676 commodities.

Weights of the commodities are derived based on the value of
quantities traded in the domestic market.

 It is the comprehensive measure of economy-wide inflation.

 CPI measures prices at retail level, WPI is constructed at

wholesale level. WPI measures average level of prices of goods
sold by producers. In WPI, fuel group gets a much higher
weightage and services not included.
 GDP or GVA deflator is a more comprehensive
measure of inflation than the other two price
indices, which are based only on a limited
basket of goods collected from select centers.
However, the deflator is available only on a
quarterly basis with a 2 month lag, which limits
its usefulness. Whereas CPI and WPI data are
released every month.

 GDP Deflator = (Nominal GDP /Real GDP) x 100

 GDP deflator base year is 2006: 100.
 2011
(base year)* 2012 2013 2014
P Q P Q P Q P Q
good A 30 900 31 1,000 36 1,050 34 1,050
good B 100 192 102 200 100 205 100 205

 Compute the GDP deflator in each year.

 Compute the inflation rate from 2011 to 2014 using
GDP deflator.
*The base period has no particular significance.
 Nominal GDP multiply Ps & Qs from same year
2011: 46,200 = 30  900 + 100  192
2012: 51,400
2013: 58,300
2014: 56,200

 Real GDP multiply each year’s Qs by 2011 Ps

2011: 46,200
2012: 50,000
2013: 52,000
2014; 52000 = 30  1050 + 100  205
 inflation
Nom. Real GDP
GDP GDP Deflator rate

2011 46,200 46,200 n.a.

2012 51,400 50,000

2013 58,300 52,000

2014 56,200 52,000

 Nom. Real GDP inflation
GDP GDP deflator rate
2011 46,200 46,200 100 n.a.
2012 51,400 50,000 102.8 2.80%
2013 58,300 52,000 112.1 9.1%
2014 56,200 52,000 108.1 -3.6%
Inflation 2014 = [(108.1 – 112.1)/112.1]100 =
-3.6% implies the overall level of prices, as
measured by the GDP deflator is 3.6% lower in
year 2014 than in year 2013.
Source: Basic data from MOSPI.
 Increase in AD
 Demand-pull inflation
 Increased government spending
 Social programs
 Decrease in AS
 Cost-push inflation
 Increase cost of production
 Push up the price level
 Stagflation
Inflation Caused by Shifts of Aggregate Demand
and Aggregate Supply Curves

(a) Demand-pull inflation: inflation caused (b) Cost-push inflation: inflation caused
by an increase of aggregate demand by a decrease of aggregate supply

Price AS Price AS’

level level AS

P’ P’
P AD’ P

AD
0 Aggregate output
An outward shift of the aggregate demand
to AD’ “pulls” the price level up from P to P’.
AD
0 Aggregate output
A decrease of aggregate supply to AS’
“pushes” the price level up from P to P’.
  Anticipated inflation
 Expected inflation
 If inflation > expected
 Lenders lose
 Borrowers gain
 If inflation < expected
 Lenders gain
 Borrowers lose

Unanticipated Inflation affects

 Fixed nominal income

 Unadjusted for inflation
 Unemployment
 Adult population
 Employed
 Working full time or part time
 Not working
 Unemployed (looking for work)
 Not in labor force
 Retired; students; don’t want to
work
 Discouraged workers
 Unemployment rate is the ratio of the
unemployed to the labor force or the
percentage of unemployed in the labor force.

 Labor force = Employed + Unemployed

Labor force participation rate =

labor force / Adult population
 Frictional unemployment
 Bring together employers and job
seekers
 Doesn’t last long
 Better match workers and jobs
 Seasonal unemployment
 Seasonal changes
 Structural unemployment
 Mismatch of skills or geographic
location
 Cyclical unemployment
 Increases during recessions
 Decreases during expansions
Number employed = 134.0 million
Number unemployed = 8.6 million
Adult population = 213.5 million

Use the above data to calculate

• the labor force
• the number of people not in the labor force
• the labor force participation rate
• the unemployment rate
 data:E = 134.0, U = 8.6, Population, POP = 213.5

 labor force
L = E +U = 134.0 + 8.6 = 142.6

 not in labor force

NILF = POP – L = 213.5 – 142.6 = 70.9

 labor force participation rate

L/POP = 142.6/213.5 = 0.668 or 68.8%

 unemployment rate
U/L = 8.6/142.6 = 0.06 or 6.0%
Source: NSSO ; IMF