Inflation and Taxes

Inflation and Taxes
Inflation and Taxes

With news of retail inflation reaching a high of 3.58% in October as per data released by the Ministry of Statistics and Programme Implementation and wholesale inflation touching a 6-month peak of 3.59%, it behoves the intelligent individual to understand how Relationship between inflation and taxes relate to each other.

Inflation and Taxes

So, what is inflation, retail or wholesale?

Inflation, in economics, is the rate at which prices of certain typical goods rise as measured in percentage terms, over a base year. As a result, the ‘purchasing power’ of your money falls, or, in other words, you are able to buy less of your daily needs after an increase in inflation rates.

In India, inflation is measured by two separate rates known as the Wholesale Price Index (WPI) and the Consumer Price Index (CPI).
While the WPI indicates the rise in prices at the level of the wholesaler or distributor, the CPI indicates rise in prices at the level of the consumer.

How are they measured?

Both the inflation and Taxes rates track changes in the price of a ‘representative basket of goods’. The WPI takes into consideration nearly 700 wholesale items which are grouped into Manufactured goods, Primary goods (food and drink etc.) and Fuel and Power (petrol, electricity in kilowatt-hours etc.). Each of these is assigned a more or less arbitrary ‘weight’ by the statistician. A weight is just a number between 0 and 1 that is multiplied by the price of that group to signify its importance. The sum of all weighted prices is then divided by the number of items and expressed as a percentage of the corresponding values in the ‘base’ year (2011-2012 according to current procedure).

The CPI, on the other hand, takes the weighted aggregate of about 260 items of common consumption. The base year used in the calculation of CPI is 2012 at the moment.

While CPI data is collected and calculated by the Ministry of Statistics and Programme Implementation every month, the WPI is managed and published by the Department of Economic Affairs, Ministry of Commerce and Industries periodically.

A relationship between Inflation and Tax

Inflation is bad from the point of view of the consumer because it leads to rise in living costs. On the other hand, the microeconomic correlation between supply and price dictates that producers will only produce more if prices were to rise. This is true because the other method of increasing revenue, increasing the consumer base, has limited scope, especially for Fast Moving Consumer Goods (FMCG). So, a little inflation is good for the economy as a whole.

Macroeconomic theory says that inflation is largely a result of “too much money chasing too few goods

Previous articleHow to fill ITR-1 Form Easily
Next articleHow to Invest in Shares and Save Taxes
All India ITR
All India ITR, one of India’s leading tax prep websites offering personal tax solutions focussing on income tax return filing through tech platforms, be it the web, Android or iOS, is dedicated to making tax returns as easy and convenient and yet as complete as possible. With value added services to help maximise tax savings and minimise tax outgo and tax investment advice the comparative advantage of specialization allows us to uniquely serve our clients. All India ITR is certified to conduct E-return intermediary services by the Income Tax Department of India.


  1. definitely like your web site but you want to check the spelling on several of your posts. Several of them are rife with spelling difficulties and I locate it really troublesome to tell the truth nevertheless I will certainly come back once more.

  2. Thanks for your feedback.

    We are glad to know that you found this page helpful. We advise you to sign up on our site to benefit from our best tax related services, such as HRA calculator, Rent Receipt generator, Income tax calculator, NRI tax plan, ITR filing, Expert Assistance, and more.

  3. Thank you for your great article .It is the clearest i have found and i am sure it is going to help me alot .
    found it to be interesting one.great work behind those hands who work behind this.The overall look of your web site is magnificent, as well as the content!

  4. Thanks this blog has really helped me alot. This really helps and tells a process that is required to fill up an Income tax return. This blog tell us step by step how we should fill taxes and yes it is also easy to understand. Each and every details have been mentioned in simple and clear language.
    i would prefer anyone to have a eye on it to clear all their doubts. The best thing about this blog is that we can get every information hear only. we shoud not go on different side to search about itr. Great work keep it up.It tell breifly and accurately about taxes. The blog is very detailed and the way it explains the things is very easy to understand and to retain it really helps a person on how to fill up the ITR and how to enquire about it. Great work from ALL INDIA ITR since it is a very well written and a very useful blog.


Please enter your comment!
Please enter your name here