Inflation: Types, Causes and Measurement

Updated 1 July 20263 min read

Inflation is a sustained rise in the general price level. Understand its types, causes, how India measures it (CPI and WPI), and how the RBI controls it.

Key Takeaways

Inflation is a sustained increase in the general price level, reducing the purchasing power of money.
India measures retail inflation using the CPI (base year 2012) and wholesale inflation using the WPI (base year 2011–12).
The RBI's flexible inflation target is 4% with a tolerance band of +/- 2%, set under the Monetary Policy Framework.

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services — that is, inflation reflects a decline in the purchasing power of money.

Types of Inflation

By Rate of Increase

Type	Description
Creeping	Slow and mild (up to ~3% per year); generally considered good for growth.
Walking	Moderate (3–10%); a warning signal for the economy.
Galloping	Very high, double or triple digit; damaging to the economy.
Hyperinflation	Extremely rapid and out of control (e.g., prices doubling in days).

By Cause

Demand-Pull Inflation — "too much money chasing too few goods." Aggregate demand exceeds aggregate supply (e.g., rising incomes, increased government spending).
Cost-Push Inflation — arises from an increase in the cost of production (e.g., higher wages or costlier raw materials like crude oil), which producers pass on as higher prices.

Stagflation — high inflation combined with stagnant growth and high unemployment.
Deflation — a sustained fall in the general price level.
Disinflation — a slowdown in the rate of inflation.
Reflation — a deliberate attempt to raise prices to counter deflation.

Measurement of Inflation in India

Index	Full Form	Released By	Base Year
CPI	Consumer Price Index (retail)	NSO, MoSPI	2012
WPI	Wholesale Price Index	Office of Economic Adviser, DPIIT	2011–12

The CPI measures the change in retail prices faced by consumers. It has variants — CPI (Combined), CPI-Rural, CPI-Urban, and older series like CPI-IW (Industrial Workers).
The WPI measures prices at the wholesale level and does not include services.
Headline inflation covers all items including food and fuel, while core inflation excludes the volatile food and fuel components to reveal the underlying trend.
The GDP deflator — the ratio of nominal GDP to real GDP — is the most comprehensive measure of inflation as it covers all goods and services produced.

Effects of Inflation

Debtors gain, creditors lose, as loans are repaid in money of lower value.
Fixed-income groups (pensioners, salaried workers) suffer as real incomes fall.
It discourages savings and can distort investment decisions.
Moderate inflation can encourage production; runaway inflation erodes confidence in the currency.

Control of Inflation

Monetary Policy (RBI): raising the repo rate, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), and using Open Market Operations (OMO) to reduce money supply.
Fiscal Policy (Government): reducing public expenditure and increasing taxes to curb demand.
Inflation Targeting: Under the amended RBI Act, India follows a flexible inflation-targeting framework with a target of 4% (+/- 2%). The Monetary Policy Committee (MPC) — a six-member body — sets the policy repo rate to achieve this target.

Prelims Pointers

CPI is released by the NSO under MoSPI; WPI is released by the Office of the Economic Adviser (DPIIT).
Headline inflation includes food and fuel; core inflation excludes the volatile food and fuel components.
The Monetary Policy Committee (MPC) has six members and decides the repo rate.
GDP deflator is the broadest measure of inflation, covering the entire economy.

Mains Angle

Distinguish between demand-pull and cost-push inflation with examples relevant to India.
Evaluate the effectiveness of inflation targeting as a monetary policy framework in India.

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