Eco bite - Inflation calculation, how?
No CommentThe inflation rate is worked out from Consumer Price Index values (CPI). The CPI is calculated from the weighted prices of several groups of articles of consumption like food items, machinery, chemicals, metals, building construction material, etc. The inflation rate is the percentage increase or decrease in the values of CPI at a specified time interval.
However, important to note is in India, instead of CPI, WPI(Wholesale price index) is used to calutate the inflation.
Lets understand the concept of weighted avg. with an example.
Let us consider a few thing that are important for living.
1)Food
2) Home
3) Oxygen
Now if i ask you to rate these three on the basis of their need for a human being then the ratings would be:
1) Oxygen
2) Food
3) Home
That mean you have determined that oxygen is the most important for living, then come food and then home. So now you will assign points to these three things as 3 for oxygen, 2 for Food, ad 1 for home.
Now, suppose we need 1 unit of eac of these three, then weighted avg i.e. price for these three would be caluated as
price of oxygen for 1 unit * 3(rating) + Price for food for 1 unit * 2 (Rating) + price of land for home for 1 unit * 1
Now this sum is devided by sum of units needed , so let us say sum of the above formula is “S”
Now, formula becomes
S/3 (3 units are needed)
Whatever avg comes is compared with the basis price for all three units w.r.t time and what ever is the change between two, if positive then it is nothing but Inflation and the percentage change is percentage inflation.
So similarly, goverment decides the ration of all comodities and then takes the weighted avg of all and compares it with the basis price. so Inflation data comes to you.
Regards,
Leave a comment!