Inflation and its some aspects

“I have said many, many times that inflation is a sinister beast.”

                                                                    -Richard Fisher

What is Inflation? Why do we care so much about inflation?
Inflation is a sustained increase in the overall level of prices. Since price stability is a key objective of monetary policy, central banks are obviously concerned with inflation. Prices of specific goods or services may go up or down relative to the prices of others reflecting changes in productivity or demand and supply conditions.
              But when the overall price level rises, it erodes the purchasing power of income, raises the cost of living and lowers the real value of savings. Savers, investors and financial intermediaries track closely the link between inflation and interest rate. The level of inflation is also critical in terms of maintaining competitiveness of domestic industry in a liberalised trading and market determined exchange rate regime. More importantly, it is the poor who are most vulnerable to inflation as they do not have any effective hedge against inflation.
            As Keynes said, "Inflation is the form of taxation which the public find hardest to evade." Thus, the issue of inflation and its measurement have always received lot of attention in India.
Core Inflation:
Another way to analyse inflation data is by looking at “core inflation,” which is generally a chosen measure of inflation that excludes the more volatile categories like food and energy prices.
Whereas  Headline Inflation includes the prices of that commodites that are volatile such as food and energy items.

What is negative inflation?
Low inflation does not mean that prices will remain low: it means that prices are rising at a slower pace than before.
Negative inflation can also be termed as deflation. Deflation is a fall in the price of goods and services. Deflation occurs when the inflation rate falls below zero per cent. This is the opposite of inflation.
        When the inflation rate is negative, the economy is in said to be in a deflationary period. This is when there is less money (supply of money) chasing the same amount of goods and services, leading to the increase in the value of the money.
Disinflation is when there is a slowdown of inflation but there is still inflation.

Why does deflation happen?
A fall in spending -- it could be personal spending or a cut in government expenditure -- leads to deflation. The decline in the supply of money and credit thus leads to deflation.
So, if money-supply decreases; supply of other goods increases, demand for money rises, and the demand for other goods slips, it is deflation.

Why is it bad for the economy?
Deflation is a fall in the price of goods and services. Deflation occurs when the inflation rate falls below zero per cent. This is the opposite of inflation.
When the inflation rate is negative, the economy is in said to be in a deflationary period.

Consequences of deflation:
It leads to a lower level of demand in the economy. It increases the real value of money. It also increases unemployment.
The main effect of deflation is that it gives people a huge incentive not to buy goods. This means that if something costs Rs 100 today, it will cost only Rs 95 next week, thus making people hold off their purchases. The good news is that gives people an incentive to save money.
But as fewer people buy, manufacturers are left with excess inventory. That means they need to reduce their supply, which means they can either stop manufacturing, which causes factory closures and layoffs, or they can reduce prices even further. But the latter causes even more deflation, leading to lower spending, leading to more deflation.
Deflation also slows down business development as entrepreneurs are less likely to invest in new business plans if they see a trend towards lower profit margins.
In a deflationary environment, those sectors with a high proportion of variable costs are likely to benefit from falling input prices

Is deflation good for you as prices may drop?
A fall in the prices may sound good for consumers. But it is not actually good. The lack in demand may push companies to further lower prices.
This can lead to a situation where the prices of product fall bellow the cost of manufacturing a product. This in turn forces the companies to cut production, slash jobs and shut down business till demand picks up. This worsens the situation.

Inflation Measures: 
Currently, there are five different primary measures of inflation - the Wholesale Price Index (WPI) and four measures of the Consumer Price Index (CPI).
In addition, Gross Domestic Product (GDP) deflator and Private Final Consumption Expenditure (PFCE) deflator from the National Accounts Statistics (NAS) provide implicit economy-wide inflation estimate.

The WPI is considered as the headline inflation measure because of its availability at high frequency and WPI does not cover prices of services. Its base year has been updated to 2004-05 by recommendations of Abhijit Sen committee.
The other four measures of CPI are :
CPI for Industrial workers (IW)
CPI for agricultural labourers (AL),
CPI for rural labourers (RL) and
CPI for urban non-manual employees (UNME).

GDP Deflator, on the other hand, is a comprehensive measure of inflation, implicitly derived from national accounts data as a ratio of GDP at current prices to constant prices. While it encompasses the entire spectrum of economic activities including services, it is available on a quarterly basis.