Inflation – by Anusha

Inflation indicates a rise in general level of prices. It is measured as an annual percentage increase. For example, if the current  level is 6%, it means the general price level has increased by 6% over the last one  year. There are variations to it like: Hyperinflation, deflation and stagflation. Hyperinflation occurs when a country experiences a very high and rapid increase in the inflation. Hyperinflation adversely affects the monetary system of the country. Deflation indicates a fall in general level of prices. It is the opposite situation. Stagflation occurs when the rate is high which leads to a stagnation in economic growth, resulting in higher levels of unemployment.

How to measure it?

In order to measure inflation, we create a price index by taking into consideration either all the commodities in the economy or a basket of sufficient number of commodities that broadly represent the economy. The formula to measure it is as follows:

Inflation in year “A” = [( P1 – P2)/(P2)]*100

Here: P1 : price index for the year “A”
P2: price index of the preceding year

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