Tutorial: How do “various individual items” contribute towards inflation?

Inflation index consists of various components. Each component holds a certain weight in the index and priced differently as well.Inflation

For instance, we have two items A and B, each priced at Rs 200 each in the INDEX which gives 40 per cent weight to A and 60 per cent to B.

INDEX = (0.40 X A + 0.60 X B)

As A and B are Rs 200, so INDEX = 200

After some time when inflation increases, A come out as 220 with 20 per cent inflation and B is recorded at 205 with 5 per cent inflation.

Now INDEX = (0.40 x 220 + 0.60 x 205) = 88 + 123.5 = 211

INDEX has increased from 200 to 211, which is 11% inflation.

Individual Contribution of A and B

We now want to know how much Inflation was caused by A and B respectively.

A changed from 200 to 220. With weight of A being 40 per cent, effective index impact comes out as 20 x 0.40 = 8 points.

So, A was responsible for 8 points from total change of 11 points.

Contribution of A = 8/11 = 73 per cent of the index change.

Similarly B = 3/11 = 27 per cent of index change.

Ashish Pandey

I am a business and finance journalist who is currently employed at Financial Express and previously at Zee News. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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