Inflation

Then how to know inflation has occured? Definitely we need a price index which will show if the cost of money has increased or decreased. There are many price indexes available .What india generally follows is the WPI(wholesale price Index). In price index instead of keep the value of money keeping constant economist have kept some group of comodities as the standard.You could have understood by now that increase in price index is actually inflation not decrease in price Index(because of the standardisation pattern).India sets 1993-94 price index(for the time being) as the the standard WPI.

Why inflation occurs?
Inflation will occur when the price index increase. That means the general price of comodities increase. Which inturn can happen in two ways That everone knows
->The cost of manufacturing the goods increases that means the wages and all those things increase. which is called the cost push inflation
->The availablity of goods is less .Means people are ready to pay more for the same thing. Hence it pulls the cost of the goods. which is called the Demand pull inflation.It may be caused due to over-avialability of money in the market.

There are some other factors also affecting it but not as much important.
But here you should mark one thing The comodities decieded to find WPI doesnot include services,I mean any kind of services. So bear it mind that only wage cost increase in agriculture or manufacturing can only affect inflation not our salaries.

One intersting fact about inflation is adding foreign money to the market decrease inflation. Sounds wrong. More money in the market means it should be more inflation. But actually if foreign money comes to indian market RBI by sterlistion(there different methods of it) takes out that much amount of Indian money from the market which actually causes a deflation rather than inflation in Indin Rupee.