Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well-known measure of Inflation is the CPI which measures consumer prices.
The Consumer Price Index is a measure prices of a list of goods and services purchased by a 'consumer'. The inflation rate is the percentage rate of change of a price index over time (typically 1 year). The list of items which are part of CPI are
• Food (this group has 8 sub items)
• Non Food like Pan, Supari, Tobacco and Intoxicants
• Fuel & Light
• Housing
• Clothing
• Miscellaneous
Due to excessive money in the system (‘Quantitative Easing’ in US, the printing of free money in US and EU) costs of basic items of consumption have increased. Also, due to the economic growth of India, levels of affordability of Indian consumers has also increased (look at the crowd at Indian malls!!!). Today more and more Indians are willing to spend higher as compared to few years ago on consumption items which are both a necessity and luxury.
The ‘young, working population’ of our country (now seen as the biggest asset of India) spends more than it saves. ‘Saving’ for a rainy day was more a habit of my parents’ generation.
Today the motto is ‘Have Money, Will Spend’. So RBI can continue to increase interest rates but if people refuse to save more than they spend, inflation is not going to come down.
PS: Inflation will ease post January 2012 because of the base effect. That’s what all policy makers in India are hoping for (fingers crossed).
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