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Government launches new inflation index

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What is inflation?

it’s the increase within the general level of costs where a unit of currency effectively buys but it did in prior periods. Often expressed as a percentage, inflation thus indicates a decrease within the purchasing power of a nation’s currency.

What is the inflation index?

An inflation index may be a tool wont to gauge general price changes in an economy over time. An inflation index tracks change within the overall price index in an economy over time. It represents a ratio of the worth of an item or the collective price of multiple items at just one occasion to the worth of that very same item or items at once more . But it’s commonly expressed as an entire number like 100.

New series for price level launched by the government:

The government unveiled a replacement series for the buyer price level for industrial workers (CPI-IW), a measure of inflation wont to calculate dearness allowance for state employees, wages for industrial workers and dearness relief for pensioners. The new series will account for changing spending habits of the labor within the organized sector.

Detailed information on new series:

• within the new series, the bottom year for calculating the CPI-IW has been revised to 2016 from 2001.

• The new series has been necessitated by changing consumption habits, relative prices of varied commodities also as spending patterns of the country’s workforce in regular jobs.

• The CPI-IW is that the basis for calculating wages and pay perks of virtually the whole organised-sector workforce, including bank employees and insurance-sector employees.

• The new index assigns more weight to spending on services like education, healthcare, housing, travel and transportation, as expenditure on these things has increased compared to expenditure on primary articles like food. this may help economists who calculate inflation to perceive a more accurate picture of a working-class household’s costs.

For example:

In the old index, the share weight assigned to food was 46.2%. within the new index, this has been brought right down to 39%. this is often keep with an theory referred to as Engle’s law, which states that as a household’s incomes rises, the share of income spent on food declines relative to other expenditure.

Due to a rise in housing costs, the new index has increased the share weight assigned to housing from 15.2% to 16.8%. Similarly, the share weight assigned to the miscellaneous category, which incorporates important heads like education and healthcare, has been increased to 30% from 16% within the old series.

In any inflation index, the bottom year is that the first year of an inflation index, with an index value of 100. Inflation indices of all other years are then compared to the bottom year to ascertain how prices increase or decrease. An inflation measure represents the share change during this index.

CPI-IW: Economic indicator

• The CPI-IW is one among the foremost important economic indicators of the country because it captures inflation faced by lakhs of workers.

• This index is employed for several economic policies. it’s a historic index, which is being released continuously monthly since 1946.

• The CPI-IW rose by 5.6% in August, compared to a 5.3% increase in July, consistent with the newest available data. Inflation for the month of September 2020, which is due, are going to be calculated supported the new series.

The government has said that the index would be revised every five years and salaries or dearness allowance wouldn’t rise immediately. which will depend upon inflation dynamics within the end of the day and once the detailed methodology is released, it’ll be possible to discuss the changes.

India currently has five consumer price indices (CPIs), three of which are working-class specific. CPIs AL and RL are wont to fix minimum wages of agricultural labourers and rural unskilled employees.

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