60-second revision
- Inflation = a sustained rise in the general price level; it reduces the purchasing power of money.
- Demand-pull = excess demand; cost-push = rising input costs (wages, oil, raw materials).
- Disinflation = falling rate of inflation; deflation = falling price level; stagflation = high inflation + stagnation.
- CPI (Rural, Urban, Combined) is compiled by the NSO; new series base 2024 released in February 2026.
- WPI is compiled by the Office of the Economic Adviser, DPIIT; covers goods only; new base 2022-23 from June 2026.
- RBI targets CPI (Combined) inflation of 4% within a 2% to 6% band (Urjit Patel Committee, 2014).
- Core inflation excludes volatile food and fuel.
- Unanticipated inflation helps borrowers and hurts lenders, savers and fixed-income earners.
What inflation is
Inflation is a sustained rise in the general level of prices, not a one-off jump in a single item. The inflation rate is the percentage change in a price index over a period, usually compared with the same month a year earlier (year-on-year). Moderate, predictable inflation is normal in a growing economy; problems arise when it is high or volatile.
Causes
- Demand-pull: aggregate demand exceeds what the economy can supply, for example due to rapid credit growth, large fiscal deficits or a surge in money supply.
- Cost-push: higher input costs push up prices even without extra demand, for example crude oil shocks, wage hikes or a weaker rupee raising import costs.
- Structural: supply bottlenecks in food, storage and transport, common in developing economies.
- Built-in (wage-price spiral): workers seek higher wages to keep up with prices, firms pass on the costs, and expectations of inflation become self-fulfilling.
The vocabulary exams test
| Term | Meaning |
|---|---|
| Creeping inflation | Slow, mild rise in prices (a few per cent a year) |
| Galloping inflation | Very rapid inflation, in double or triple digits |
| Hyperinflation | Runaway inflation in which money loses value very fast (classically above 50% a month) |
| Deflation | Sustained fall in the general price level |
| Disinflation | Fall in the rate of inflation; prices still rise, but more slowly |
| Reflation | Deliberate policy to raise prices and output after a slump or deflation |
| Stagflation | High inflation combined with stagnant output and high unemployment |
| Skewflation | Sharp price rise in a few items (often food) while overall inflation is moderate |
| Headline inflation | Inflation of the full index, including food and fuel |
| Core inflation | Inflation excluding volatile food and fuel |
Measuring inflation in India
| Index | Compiled by | Base year | Notes |
|---|---|---|---|
| CPI (Rural, Urban, Combined) | NSO, MoSPI | 2024 (new series from January 2026 data) | Retail prices of goods and services; RBI's target index |
| WPI | Office of the Economic Adviser, DPIIT | 2022-23 (new series from June 2026) | Wholesale prices of goods only, no services |
| CPI-IW (Industrial Workers) | Labour Bureau | Revised periodically (2016 series introduced in 2020) | Used for dearness allowance of government employees |
| GDP deflator | NSO, MoSPI | Same as GDP series (2022-23) | Covers all domestic output; excludes imports |
CPI gives a much higher weight to food than WPI, because food is a large share of what households spend. That is why a vegetable price spike shows up more sharply in CPI. The new CPI (base 2024) uses weights from the Household Consumption Expenditure Survey 2023-24 and groups items into 12 divisions in line with the international COICOP 2018 classification.
Inflation targeting
The Urjit Patel Committee (2014) recommended CPI (Combined) as the nominal anchor for monetary policy. The RBI Act was amended in 2016 to create a statutory framework: a target of 4% CPI inflation with a tolerance band of 2% to 6%, fixed by the Centre every five years. The same target was retained in 2021 and again for April 2026 to March 2031. The six-member Monetary Policy Committee sets the repo rate to meet it.
Winners and losers
| Tend to lose | Tend to gain |
|---|---|
| Lenders and creditors at fixed rates | Borrowers and debtors at fixed rates |
| Fixed-income earners and pensioners (without indexation) | Owners of real assets such as property and gold |
| Savers holding cash and low-interest deposits | Governments with large nominal debt |
| Exporters, if domestic inflation outpaces trading partners' | Producers when output prices rise faster than costs |
Inflation also redistributes through the tax system: if tax slabs are not adjusted, rising nominal incomes push people into higher brackets (bracket creep). Very high inflation erodes trust in money and disrupts planning, which is why central banks aim for low and stable inflation rather than zero.
Useful relationships
- Phillips curve: an inverse short-run relationship between inflation and unemployment, from A. W. Phillips (1958). Stagflation in the 1970s showed it can break down in the long run.
- Real interest rate = nominal interest rate - inflation rate (approximately). If a deposit earns 6% and inflation is 5%, the real return is about 1%.
- Base effect: a low price level a year earlier makes this year's year-on-year inflation look high, and vice versa, even if prices are stable now.
- Fiscal tools against inflation: cutting the deficit, reducing indirect taxes, releasing buffer stocks and allowing imports of scarce goods.
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