What is Inflation? | The Price Stability Guide
A sustained increase in the general price level of goods and services. Learn about CPI, WPI, and how RBI targets inflation.
Defining Inflation
In simple terms, inflation is the rate at which the general level of prices for goods and services is rising, and consequently, the purchasing power of currency is falling.
Demand-Pull Inflation
Occurs when the demand for goods and services exceeds their supply. "Too much money chasing too few goods."
Cost-Push Inflation
Occurs when the cost of production (raw materials, wages) increases, leading producers to raise prices.
Measuring Inflation: CPI vs WPI
India uses two primary indices to measure inflation. Since 2014, the RBI has shifted its focus to CPI for monetary policy decisions.
| Feature | WPI | CPI |
|---|---|---|
| Level | Wholesale/Producer | Retail/Consumer |
| Services | Not Included | Included |
| Released By | Office of Economic Adviser | NSO (MoSPI) |
UPSC Relevance: Inflation Targeting
The 4% (+/- 2%) Mandate
Under the RBI Act, the Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in every five years.
- •Primary target: 4%
- •Tolerance band: 2% to 6%
Prelims Pointers
Headline vs Core Inflation
- Stagflation: Slow economic growth + high unemployment + high inflation.
- Disinflation: A decrease in the rate of inflation (prices still rising, but slower).
- Deflation: A general decrease in price levels (inflation rate becomes negative).
- Reflation: The act of stimulating the economy by increasing the money supply or by reducing taxes.