What is Inflation Rate?

We may heard the word inflation many times during year end budget discussion  or where ever economic meeting is happening. What is  mean by this inflation?.How it is calculated?  Inflation is nothing but rate of price incremental from last year to this for any products or any services. Let see the simple example to understand this.


Lets say last year 1 kg of rice price is 50 Rs and this year it has been increased to 55 Rs. Now we are going to calculate inflation rate for the year and formula to calculate inflation is .

Inflation Rate = ((Final Index Price - Initial Index Price)/Initial Index Price) * 100

If we apply our values into the above formula

Inflation Rate =  ((55 - 50)/50) * 100
Inflation Rate = 10 %

We have found the inflation rate for rice, Now how are we calculating total India's inflation rate?. Indian govt took basket of products from various industries like vegetables,fruits,factories,industries etc. Each product has its own weightage to derive the country inflation rate. Its obvious that more inflation rate product decides the  inflation numbers. So the total inflation rate is derived out of all these products inflation rates.

What Happens when Inflation Rate Increased: 

1. If inflation increases buying power of the people will be reduced.
2. Inflation rate is going high means country's economic growth is not going good.    
3. Well developed countries inflation rate is 2-3% only

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