Wholesale price and not the retail price
The prices of the selected commodities for determining the rate of inflation over a period of one year could be on the wholesale or retail. The latter one is mostly referred to as “consumer price”. Thus we have a “wholesale price index” and “consumer price index” for expressing rates of inflation. Conventionally in India the rate of inflation has always been expressed in “wholesale price index” basis rather than “consumer price index” basis although the consumer price index increase is also published regularly. At present the wholesale price index inflation is around 3%. We will explain this concept through an example.
I had spent Rs. 100/- in getting a basket of commodities one year ago. If the rate of inflation is say 3%, now I will be required to spend Rs. 103/- to get the same basket of commodities. How do we get Rs.103/-? Rs. 100/- x 1.03 = Rs. 103/-. This means that due to “inflation”, the purchasing power of the local currency decreases with the passage of time. This is exactly the concept of “time value of money”. In simple words, “time value of money” means that with the passage of time, money loses its value.
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