Inflation is a measure of rise in general price levels of goods and services. Inflation is measured by taking a set of goods and services, and then the prices of the items in the set are compared to prices one time period ago.

In India, inflation is measured based on the wholesale price index (WPI) which measures the change in prices of a selection of goods at wholesale prices. Inflation is primarily of two types – inflation due to cost push and inflation due to demand pull (supply side). Cost push inflation is due to rise in costs of input materials or labour, whereas demand pull inflation is due to increase in demand beyond installed capacity.

Here are some of the main reasons behind rising inflation:

Price rise of essential commodities

The prices of the basic commodities – milk, vegetables, cereals, dairy products, cement, steel, edible oil etc – have gone up quite significantly, especially in the last few weeks. This is due to supply concerns. There is fear in the market that the supply of basic commodities is not increasing in proportion to population growth. This has triggered a wave of speculation in commodities and hence the prices are going up rapidly.

Commodity prices rise at global level

Rise in commodity prices at the global level is another factor that contributes to higher inflation in the country. The correction in global stock markets resulted in a rise of commodity prices all over the world as investors are using commodities, especially precious metals, to hedge their risk.

Rising oil prices

Crude oil prices have gone up significantly in the last few weeks. Although the government is controlling fuel prices in the country, rising crude oil prices plays a crucial role in general price rise.

Increasing demand

India’s economy is growing at around 7-8 percent per annum over the last few years. The per capita income levels have gone up and as a result, the demand for many commodities has increased significantly.

Basically, inflation does not have any direct relation to a fall or rise in the stock markets in the short term. However, when inflation goes up beyond the comfortable limit of the RBI and government, they take some strong policy measures such as tightening of monetary policies, regulatory controls, subsidy etc.

[source]