Inflation
Inflation is one idea with several thermometers. Questions here are usually about which index measures what, who publishes it, and what kind of inflation a given cause produces.
Mental model
Every inflation question is one of three questions in disguise. First, what caused it? Demand-pull means too much money chasing too few goods, so the cure is tightening demand; cost-push means input costs rose (oil, wages, crop failure), so tightening demand only makes output fall. Second, how is it measured? WPI is wholesale, has no services in it and is published by the Office of the Economic Adviser; CPI is retail, includes services, is published by the National Statistical Office, and is what the RBI actually targets. Third, how bad is it? Creeping, walking, galloping, hyperinflation; and the traps to name — deflation (falling prices), disinflation (prices still rising but more slowly), and stagflation (inflation with stagnant output, the case where no single policy works).
Associations
A short trigger on the left, everything it pulls with it on the right.
CPI is the household, WPI is the warehouse.
The consumer price index tracks what a household actually pays, including services, and is the index the RBI targets. The wholesale price index tracks prices of goods traded in bulk, excludes services, and moves earlier in the chain.
Demand-pull pulls prices up; cost-push pushes them up.
Too much money chasing too few goods is demand-pull. A rise in input costs — fuel, wages, imported raw material — passed on to buyers is cost-push. The distinction matters because monetary tightening works on the first far better than on the second.
Things to remember
The night-before list. Short enough to recall cold.
- 1The consumer price index is compiled by the National Statistical Office; the wholesale price index by the Office of the Economic Adviser.
- 2The RBI targets CPI inflation, not WPI inflation.
- 3Core inflation excludes food and fuel, the two most volatile groups, to show the underlying trend.
- 4Disinflation is a fall in the rate of inflation; deflation is an actual fall in the price level.
- 5Stagflation is high inflation together with stagnant growth and high unemployment — the hardest combination for policy.
- 6Inflation hurts creditors and people on fixed incomes, and benefits debtors, because it erodes the real value of money owed.
In detail
- The RBI's monetary policy targets Consumer Price Index (Combined) inflation, not WPI; the CPI includes services while the WPI does not, which is the single most examined difference between them.
- Headline inflation is the overall index; core inflation strips out food and fuel because those are volatile and supply-driven, so core is read as the underlying demand pressure in the economy.
- The GDP deflator is the ratio of nominal GDP to real GDP and is the broadest price measure because it covers every good and service in the economy, unlike CPI and WPI which use fixed baskets.
- Inflation redistributes: it hurts fixed-income earners, pensioners and creditors, and benefits debtors, because loans are repaid in money that is worth less than when it was borrowed.
- Stagflation is the simultaneous occurrence of high inflation and stagnant growth with high unemployment; it is the standard example used to show why demand management alone cannot solve every inflation.
Where people slip
- Deflation and disinflation are not the same. Disinflation means prices still rise, just more slowly.
Check yourself
Nothing here is scored — it will not change your mastery figures.
Which index does the Reserve Bank of India use for its inflation target?
From the question bank
Inflation is best defined as:
From the question bank
The CPI (Consumer Price Index) is used to primarily measure:
Books to read
- NCERT Class XII — Introductory Macroeconomics
- Indian Economy by Ramesh Singh
- Economic Survey, published annually by the Ministry of Finance
Official sources
Hand-checked official domains only — the notes above carry no links of their own.