According to Adolphe Houdard (Premiers Principes de l’Economique, Paris, 1889), ‘Price’ is “the expression of the exchange value of a thing in units of exchange value”. In layman’s language, ‘Price’ is the exchange value for any commodity or service. Often, price rise and inflation are considered the same. But there is a subtle difference between them. Inflation is a rise in some set of prices or a general rise over a given period. A price rise is an increase in the price of a commodity for a specific period. Price rise can be measured by Index Number. The Index Number is a number that shows the variation in price rise or value compared with the price or value at a specified earlier time. There are two major indices: Consumer Price Index (CPI) and Wholesale Price Index (WPI). The Consumer Price Index measures the average variation between two given periods in the prices of products consumed by households. The Wholesale Price Index measures overall change in producer prices over time. Apart from these two indices, there are Quantity Index Numbers, Productive Price Index, and many more.
Causes of price rise : One of the causes of price rise is unpredictable weather conditions. Farmers in India are heavily dependent on monsoons for crop production. A delayed monsoon plays spoilsport for the irrigation of crops. On the other hand, excess rain too can destroy the crops, leading to a decrease in the supply of foodgrains and, hence, a price rise. For example, recently, there was an immense rise in the price of tomatoes. According to the country’s National Institute of Biotic Stress Management, the floods were the main reason behind the rise in the price of tomatoes. In addition, hoarders hold the stock of goods and stop the supply, which causes a shortage of goods and thus the prices rise. A sudden shift of demand from one good to another also leads to an increase in demand for that good; as a result, demand exceeds the supply, and the prices rise. For example, customers shifted from skinny bottoms to bell bottoms. Now, there was an increase in demand for bell-bottomed jeans. As a result, the price of bell-bottomed jeans went up, and the price of skinny bottoms declined.
Further, when the purchasing power of people increases, demand for goods increases. As a consequence of higher demand than supply, price rises.
Impact of price rise : Lower middle-class or daily-wage earners are most affected by the price rise. This leads to economic inequality. Price rise creates uncertainty. As a result, investors find themselves in a dilemma in investing in an uncertain sector. There is also an effect on the balance of payment because, due to the rise in the price of imported goods, there are fewer imported goods than exported goods. The price rise may lead to the misallocation of resources as entrepreneurs may prioritise short-term gains over long-term planning.
Solutions to mitigate price rise : The central bank, i.e., the Reserve Bank of India (RBI), plays a vital role during times of economic fluctuations. It influences the price using quantitative instruments such as Interest Rates, Bank Rate, Repo Rate, and Open Market Operations. The central bank also uses qualitative instruments such as Margin Requirements, Moral Suasion, and selective credit controls. Policies aimed at increasing the production capacity of an economy, such as investments in education, technology, and infrastructure, can help address cost-push inflation. The government can intervene in currency markets to stabilise exchange rates and reduce the impact of import-related price rises. The government can use fiscal policies to manage price rises by adjusting taxes and spending. In rare cases, governments may implement price controls on essential goods to protect consumers from price rises. However, this may have unintended consequences, such as shortage.
Conclusion
A price rise is an economic phenomenon that means a rise in the value of commodities and services. There are several indicators available to calculate price rise. We have a handful of reasons for price rise, and fixed-wage earners are most vulnerable to price rise. However, the price rise can be alleviated with the right policies and measures, particularly for the good of poor and lower middle-class people.