Inflation: Types, Measurement and Control

Prerequisites

• Money and the Reserve Bank of India: money supply and why “too much money” raises prices
• Monetary Policy and the MPC: the inflation target and the tools used to hit it
• Basic Concepts of the Economy: nominal vs real GDP and the GDP deflator

The Hook: Onion Up, Tomato Down

Why it matters: Prelims tests definitions (deflation vs disinflation, stagflation, core inflation), index details (publisher, base year, weights) and tool directions. Mains asks for causes, effects on the poor, and an evaluation of India’s anti-inflation measures. The 2026 revisions of both CPI and WPI make this a likely current-affairs area.

What Inflation (मुद्रास्फीति) Is

Inflation is a sustained rise in the general price level of goods and services over time. It reduces the purchasing power of money. A one-time rise in a single price is not inflation.

for year-on-year (YoY) monthly inflation. Base effect: if prices were unusually low a year ago, this year’s YoY inflation looks high even if prices are steady now, and the reverse.

Related terms

Types by speed

These labels are textbook conventions. Exact thresholds differ between books, so learn the order rather than the numbers.

Creeping (रेंगती) → Walking → Running → Galloping (सरपट) → Hyperinflation (अति-मुद्रास्फीति)

Hyperinflation means prices rise so fast that money stops being used (Germany 1923, Zimbabwe 2008).

Causes of Inflation

graph TD
    A["Causes of inflation"] --> B["Demand-pull
'Too much money chasing
too few goods'"]
    A --> C["Cost-push
Costs of production rise"]
    A --> D["Structural
Supply bottlenecks"]
    B --> B1["Rising money supply, credit boom,
high fiscal deficit, rising incomes"]
    C --> C1["Oil and fuel prices, wages,
raw materials, rupee depreciation
(imported inflation)"]
    D --> D1["Low farm productivity, weak storage
and markets, poor infrastructure"]
    C1 --> E["Wage–price spiral
(built-in inflation)"]
    B1 --> E

• Demand-pull: aggregate demand exceeds what the economy can supply at current prices. Monetary and fiscal tightening work best here.
• Cost-push: supply shocks such as a jump in crude oil prices, a bad monsoon or higher wages raise costs. Output may fall as prices rise, which can produce stagflation.
• Structural: in a developing economy, supply bottlenecks in agriculture, storage, transport and markets push prices up whenever demand grows. This view is associated with the Latin American structuralist school and fits India’s frequent food inflation.
• Imported inflation: a weaker rupee or higher world prices raise the rupee cost of imports such as crude oil, edible oils and fertilisers.

Measuring Inflation in India

Consumer Price Index (CPI, उपभोक्ता मूल्य सूचकांक)

Other CPIs (Labour Bureau, Ministry of Labour and Employment):

• CPI-IW (Industrial Workers), base 2016: used to revise dearness allowance of Government employees.
• CPI-AL / CPI-RL (Agricultural / Rural Labourers): used for wages of farm and rural workers.

Wholesale Price Index (WPI, थोक मूल्य सूचकांक)

GDP deflator

It covers all goods and services produced in the economy, including services and investment goods, so it is the broadest measure. But it is available only quarterly, with a lag.

CPI vs WPI

The numbers in 2026

Why the gap? In August 2026, wholesale inflation was led by fuel and power, which carry a much larger weight in WPI than in CPI. CPI also includes services, whose prices move slowly, and WPI does not. A wide WPI–CPI gap usually means producers are absorbing cost increases. Some of this may pass to consumers later, which is one reason the MPC watched the data before acting at its August 2026 review.

Effects of Inflation

• Inflation is regressive: poor households spend a larger share of income on food, so food inflation hits them hardest. It is often called a “tax on the poor”.
• Moderate, stable inflation is compatible with growth. High and volatile inflation discourages savings and long-term investment.
• Deflation is not good news either: falling prices raise the real burden of debt, make consumers postpone purchases and hurt producers. For a vegetable grower, a price crash can wipe out a season’s income.

Controlling Inflation

Memory Tricks

Don’t Confuse

Common Mistakes

Practice

All questions below are original practice questions written in CGPSC style. They are not previous-year questions.

Level 1: Foundation

1. A situation of high inflation along with stagnant output and high unemployment is called ______.
2. The new Consumer Price Index released in February 2026 has the base year ______.
3. Inflation excluding food and fuel is called ______ inflation.

Level 2: Prelims MCQs

Q1. Consider the following statements about the Consumer Price Index series released in February 2026:

1. It has 2024 as the base year.
2. The weight of food and beverages is higher than in the 2012-based series.
3. It includes price data from online markets.

Which of the statements given above is/are correct?

• (a) 1 only
• (b) 1 and 3 only
• (c) 2 and 3 only
• (d) 1, 2 and 3

Q2. Match List I (Index) with List II (Compiling agency):

• (a) A-2, B-3, C-1
• (b) A-3, B-2, C-1
• (c) A-2, B-1, C-3
• (d) A-1, B-3, C-2

Q3. If the annual inflation rate falls from 6% to 3%, the economy is experiencing:

• (a) deflation
• (b) disinflation
• (c) reflation
• (d) stagflation

Q4. Who among the following is most likely to gain from unanticipated inflation?

• (a) A pensioner on a fixed monthly pension
• (b) A bank depositor holding a fixed-rate deposit
• (c) A farmer repaying a fixed-rate loan taken two years ago
• (d) A lender who has given a fixed-rate loan

Q5. Which one of the following is not covered by the Wholesale Price Index?

• (a) Primary articles
• (b) Fuel and power
• (c) Manufactured products
• (d) Services such as education and health

Level 3: Mains Answer Writing

Q1. (150–200 words) “Food inflation in India is more a supply-side problem than a monetary one.” Discuss.

Q2. (60 words) Why can WPI inflation and CPI inflation diverge sharply? Explain with an example.

Quick Revision Table

Key Takeaways

What’s Next

• Money, Banking and Inflation — Quick Revision
• Public Finance: fiscal deficit, taxation and their effect on prices
• External Sector: exchange rates and imported inflation
• Poverty and Employment: inflation and real incomes of the poor