Vagaries of Inflation

Vagaries of inflation can be defined as the rapid rise or fall in the inflation rate in an economy. The increase in the cost of services and goods over a time period is termed inflation. The unexpected inflation rise in a country or economy tells us about the country’s market and how expensive or cheap business flourishes there.

To control unexpected inflation in the economy, the governments form monetary policies and make changes in the tax rates to influence the country’s goods and services prices. The following article explores the factors and the cause of inflation that affect the vagaries of inflation.

Inflation

Inflation is a price increase in the value of goods. In some cases, inflation may rise unprecedentedly and may become unusual. Such a situation may cause unrest in public. Inflation can also be explained as: 

• The potential increase in the cost of services and goods in an economy. 
• An incessant and substantial increase in common levels of cost of services and goods. 
• The steady and constant increase in the prices. 

In economic terms, it is understood that if the prices of one particular good increase, it is not considered inflation in the economy. However, if the price of all or most of the goods increases, the situation is viewed as inflation.

Vagaries of Inflation

In an economy, unexpected inflation is influenced by various factors such as the supply and demand of goods, tax rates, etc. Moreover, the inflation rate keeps changing in the economy, causing vagaries in inflation patterns. The following factors cause inflation in an economy:

• Monetary policy of a government or central bank.
• Tax rates that are put up by central banks.
• A potential boost in spending by the consumer.
• Boost disposable income in an economy. 
• Significant increase in public expenditures by the governments.
• Considerable increase in the supply of money in the economy.
• Remarkable increase in public borrowing of the government.
• Marked increase in private investment in the economy.
• Significant rise in exports of a country.
• Mass printing of banknotes by the central banks.

If these issues remain unaddressed, an extreme rise or drastic fall in the inflation rate may cause specific inflation concerns such as hyperinflation. Countries like Venezuela, Zimbabwe, Hungary, and Sri Lanka have experienced severe effects of vagaries of inflation.

Measuring Inflation

Different economies follow various methods to measure inflation. Calculation of inflation in India is done in two indices:

1. The Consumer Price Index (CPI)
2. The Wholesale Price Index (WPI)

CPI (Consumer Price Index)

The estimation of the inflation rate at a specific time period is known as the consumer price index. The index considers a basket of goods and services, and the average change in the prices of goods and services in that basket for a certain period is calculated. CPI gives a broader picture of inflation in the economy as it measures inflation for goods and certain services.

WPI (Wholesale Price Index)

The wholesale price index also evaluates the inflation rate for a certain period of time. However, it slightly differs from the CPI measure. The wholesale price index calculates the inflation rate for the goods right before their retail value, which means that the WPI decides inflation for the selling price of the goods. WPI does not include inflation rates for the services.

Hyperinflation

Hyperinflation is a condition when vagaries of inflation become uncontrollable, and inflation concerns the general public daily. It is a situation when prices of goods rise to extreme levels in an economy. Such a condition can be fatal for an economy and result in a humanitarian crisis. In the last decade, Venezuela’s South American country went through one of the worst hyperinflations. In 2020, the rate of inflation increased to 2,959.8% in India.  

The unexpected inflation may look uncontrollable, but in most cases, authorities can indeed control inflation by adopting suitable monetary policies and avoiding a situation like hyperinflation. The following factors can keep a check on the vagaries of inflation:

• Relevant monetary policies
• Interest rates policies; timely revisions of repo rate and reverse repo rates
• Altering the policies of reserve ratios like cash reserve ratio and statutory reserve ratio
• Adapting to open market operations to tackle the rising inflation
• Adopting measures of credit control.

A country cannot control the factors of inflation concerns entirely. The inflation keeps changing from time to time. However, central banks and governments can adopt measures to check the inflation rate and keep the cause of inflation under control.

Conclusion

Inflation is described as the rise in the general price of a good or service. Unexpected inflation can be calculated using various tools. India uses Consumer Price Index (CPI) and the Wholesale Price Index (WPI) to measure this inflation. The inflation rate may change throughout the year. The unprecedented change in the inflation rate is described as vagaries of inflation. If inflation rises or falls to uncontrollable measures, the economy may undergo conditions of hyperinflation and stagnation. Hyperinflation is a condition of extreme inflation.