Why this matters now
Inflation drives monetary policy, affects the cost of living and is a constant news theme. Prelims tests the WPI/CPI distinction and the inflation-targeting framework; GS-3 tests causes, effects and the policy trade-off between growth and price stability.
Types of inflation
| By cause | By speed / nature |
|---|---|
| Demand-pull — too much money chasing too few goods | Creeping / walking / galloping / hyperinflation (by intensity) |
| Cost-push — rising input costs (fuel, wages) push prices up | Stagflation — high inflation + stagnant growth + high unemployment |
| Built-in / wage-price spiral | Deflation (falling prices) and disinflation (falling rate of inflation) |
How India measures inflation
| WPI | CPI |
|---|---|
| Wholesale Price Index — prices at the wholesale/producer level | Consumer Price Index — prices at the retail level faced by households |
| Published by the Office of the Economic Adviser (DPIIT) | Published by the NSO (MoSPI) |
| No services; goods only | Includes services; has food & fuel weight |
| Base year 2011-12 | Base year 2012 |
The RBI targets CPI (Combined) inflation as the headline measure. Core inflation excludes volatile food and fuel.
How inflation is controlled
India follows flexible inflation targeting (since 2016): the government, in consultation with the RBI, sets a CPI target of 4% with a tolerance band of ±2% (i.e., 2-6%). The Monetary Policy Committee (MPC) raises or lowers the repo rate and uses other tools to keep inflation in band. The government complements this with supply-side measures (buffer stocks, import/export duties, anti-hoarding action).
UPSC angle
Nail the WPI vs CPI table and the 4% ±2% flexible inflation-targeting framework (MPC, repo rate). Distinguish core from headline, and deflation from disinflation.
Frequently asked questions
What is inflation?
A sustained rise in the general price level that reduces the purchasing power of money. Moderate inflation is normal; high or volatile inflation hurts the economy, especially the poor.
What is the difference between WPI and CPI?
WPI measures wholesale/producer prices (goods only, by DPIIT); CPI measures retail prices faced by households (includes services, by NSO). The RBI targets CPI inflation.
What is India’s inflation target?
Under flexible inflation targeting (since 2016), CPI inflation of 4% with a ±2% band (2-6%), managed by the Monetary Policy Committee via the repo rate.
What is stagflation?
A situation of high inflation combined with stagnant growth and high unemployment — a difficult mix because tools that fight one tend to worsen the other.