Macroeconomic Impacts Of Deflation In India

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The CPI reflects the consumption bundle of households, and is thus more relevant than any other measure of inflation. Second, the CPI-IW also reflects prices of food as accurately as other measures. Third, CPI-IW includes the price of services that are not included in any other measure of inflation. Further, the WPI or the PPI largely reflect global prices of trade ables expressed in rupees. Monetary policy of the RBI has a minimal role in influencing these, other than through the exchange rate. On the contrary, the consumer price index has a large share of non-tradables. Monetary policy of the RBI has a much bigger role to pay in influencing domestic non-tradable prices.

Indian macroeconomic analysis and policy thinking thus needs to move away …show more content…

This action increases the cost associated with borrowing currency, thereby reducing the demand of goods and services, which in turn reduces or stabilizes the prices of these goods and services.

What is Deflation - Deflation is the continuous decrease in prices of goods and services. Deflation occurs when the inflation rate becomes negative (below zero) and stays there for a longer period.

What are the effects of Deflation? - During deflation the price of goods and services continue to fall and during that consumers will tend to delay their purchases hoping that prices may fall further. This is dangerous as this will lead to lower production, lower wages, and decline in demand and thus, consequently lead to further decrease in prices. This is known as deflationary spiral.

What is Deflationary Spiral? - It is a situation when decrease in the prices leads to lower production, lower wages and demand, which can lead to further decrease in the prices. A deflationary spiral is when decrease in prices lead to a vicious circle (a trouble leads to another that aggravates the first).

How inflation is calculated in

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