Inflation and its Measurement in India
Indian Economy
- PYQs8
- Articles1
Background
Understanding inflation is crucial for economic policy, its impact on different sectors, and the role of the central bank. UPSC frequently asks about inflation types, causes, effects, and measurement.
Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. In India, the primary measures of inflation are the Consumer Price Index (CPI) for retail inflation and the Wholesale Price Index (WPI) for wholesale inflation, with the Producer Price Index (PPI) being an emerging measure.
Facts & tables
- CPI (Combined)
- Measures changes in prices of goods and services purchased by consumers, used by RBI for inflation targeting.
- WPI
- Measures changes in prices of goods at the wholesale level, reflecting producer costs.
- Core Inflation
- Excludes volatile components like food and fuel to reveal underlying price trends.
- Drivers of Inflation
- Food and fuel costs are significant contributors to headline inflation in India.
| Index | Measures | Base Year | Used by RBI |
|---|---|---|---|
| CPI (Combined) | Retail prices of goods/services | 2012 | Yes |
| WPI | Wholesale prices of goods | 2011-12 | No (primarily for policy analysis) |
| PPI | Average change in selling prices received by domestic producers | N/A (new series) | Emerging |
| Type | Reference |
|---|---|
| Conceptual area | Macroeconomic Trends & Inflation |
| Body | Role |
|---|---|
| Reserve Bank of India | Monitors and targets inflation |
Prelims angle
Prelims angle: Multi-statement analysis
Prelims angle: Conceptual understanding
- CPI (Combined) is RBI's primary inflation target.
- Food and fuel prices are major drivers of headline inflation.
- Core inflation excludes volatile food and fuel components.
- WPI measures wholesale price changes, PPI measures producer prices.
- High inflation erodes purchasing power and impacts economic stability.
| Year | Framing tags |
|---|---|
| 2023 | Multi-statement analysis, Conceptual understanding |
| 2022 | Multi-statement analysis, Conceptual understanding |
| 2022 | Statement-based questions, Conceptual understanding |
| 2022 | Institutional roles and functions, Factual recall |
| 2020 | Multi-statement analysis, Conceptual understanding |
| 2019 | Statement-based questions, Factual recall |
| 2015 | Factual recall, Terminology-based question |
| 2015 | Factual recall, Institutional roles and functions |
Timeline
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Macroeconomic Trends & Inflation
Conceptual area
-
Prelims 2015
Factual recall, Terminology-based question
-
Prelims 2015
Factual recall, Institutional roles and functions
-
Prelims 2019
Statement-based questions, Factual recall
-
Prelims 2020
Multi-statement analysis, Conceptual understanding
-
Prelims 2022
Multi-statement analysis, Conceptual understanding
-
Prelims 2022
Statement-based questions, Conceptual understanding
-
Prelims 2022
Institutional roles and functions, Factual recall
-
Prelims 2023
Multi-statement analysis, Conceptual understanding
-
Fuller expression: on India’s inflation
Inflation is the general increase in prices. India uses CPI (retail) and WPI (wholesale) to measure it, with PPI emerging. Food and fuel are major drivers, and core inflation excludes these volatile items.
See also
Past papers
2015–2023 · 8 questions
In the news
Fuller expression: on India’s inflation
Inflation is the general increase in prices. India uses CPI (retail) and WPI (wholesale) to measure it, with PPI emerging. Food and fuel are major drivers, and core inflation excludes these volatile items.
Try these PYQs
Consider the following statements:
1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct?
Statement 1 is correct. As per the data given in the Economic Survey 2019-2020, the weightage of food in the Consumer Price Index (CPI) Combined is 45.9% as compared to 24.4% in Wholesale Price Index (WPI). Statement 2 is correct. The CPI measures the average change in prices over time that consumers pay for a basket of goods and services, commonly known as inflation, whereas WPI does not measure the average change in prices. Statement 3 is incorrect. In April 2014, the RBI adopted the Consumer Price Index (CPI) as its key measure of inflation. Hence, option A is the correct answer.
Which of the following brings out the ‘Consumer Price Index Number for Industrial Workers’?
The Labour Bureau, attached to the Ministry of Labour and Employment, is responsible for compiling and publishing the Consumer Price Index Number for Industrial Workers (CPI-IW) in India. This index tracks changes in the retail prices of a basket of goods and services consumed by industrial workers. It serves as a crucial indicator of inflation faced by this specific segment of the population. The Labour Bureau is responsible for maintaining:
- CPI (Industrial Workers) - CPI (Rural Labourers) - CPI (Agricultural Labourers)
In the Index of Eight Core Industries, which one of the following is given the highest weight?
About Eight Core Sectors: These comprise 40.27% of the weight of items included in the Index of Industrial Production (IIP). The eight core sector industries in decreasing order of their weightage:
Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
The responsibility for maintaining price stability and controlling inflation in India lies primarily with the Reserve Bank of India (RBI). The RBI formulates and implements monetary policy to maintain price stability and ensure adequate flow of credit to productive sectors of the economy. As the central bank of the country, the RBI uses various tools such as repo rate, reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR) to influence liquidity and interest rates in the economy, thereby affecting inflationary pressures.
With reference to the Indian economy, consider the following statements:
1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given below is/are correct?
Statement 1 is incorrect. Typically, the RBI uses open market operations to sell government securities to drain money from the system and control inflation. Buying government securities would inject money into the system, potentially fueling inflation further. Statement 2 is correct. Selling dollars in the market - If the rupee is rapidly depreciating, the RBI might intervene in the foreign exchange market by selling dollars from its reserves. This increased supply of dollars in the market can help stabilize the exchange rate and slow down the depreciation of the rupee. Statement 3 is correct. Lower interest rates in the US/EU make India a more attractive destination for foreign investment, leading to a large inflow of dollars. This causes the rupee to strengthen (appreciate). To prevent the rupee from appreciating too rapidly and hurting exporters, the RBI buys the excess dollars from the market.
Show 3 more PYQs
With reference to Convertible Bonds consider the following statements:
1. As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
2. The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.
Which of the statements given above is / are correct?
A convertible bond is a type of debt security that provides an investor with a right or an obligation to exchange the bond for a predetermined number of shares in the issuing company at certain times of a bond's lifetime. It is a hybrid security that possesses features of both debt and equity. * Statement 1 is correct: Convertible bonds tend to offer a lower coupon rate or rate of return in exchange for the value of the option to convert the bond into a common stock. Investors will generally accept a lower coupon rate on a convertible bond, compared with the coupon rate on an otherwise identical regular bond, because of its conversion feature. This enables the issuer to save on interest expenses, which can be substantial in the case of a large bond issue. * Statement 2 is correct: The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices as equity prices can differ widely from the given interest and the difference in that can be used as a hedge for inflation.
Correct the following statements:
Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
Which one of the following is correct in respect of the above statements?
* Statement I- correct: In the aftermath of the COVID-19 pandemic, many central banks around the world observed rising inflation. To combat this inflation, they resorted to raising interest rates. This is a well-established monetary policy tool to curb inflation by making borrowing more expensive and encouraging saving, thereby reducing the money supply in circulation. * Statement II- correct: Central banks are entrusted with maintaining price stability and managing inflation. Raising interest rates is one of the primary instruments they use to achieve this objective. While other factors can influence inflation, central banks do have the ability to significantly impact it through monetary policy measures. Therefore, both statements accurately reflect the role of central banks and their use of interest rates to manage inflation and statement 2 is the correct explanation for statement 1.
Consider the following statements:
1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries.
2. In terms of PPP dollars, India is the sixth largest economy in the world.
Which of the statements given above is/are correct?
Statement 1 is correct: Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries. Statement 2 is incorrect: India is not the sixth-largest economy in the world in terms of PPP dollars. It is currently the third largest economy in terms of PPP dollars, after China and the United States.