Inflation Indices and their Evolution in India
Indian Economy
- PYQs8
- Articles1
Background
Inflation management is a core function of the RBI's monetary policy. Understanding the different indices, their methodologies, and recent upgrades is vital for comprehending economic policy decisions, their impact on various stakeholders, and the overall economic environment.
Inflation indices are statistical measures that track changes in the price level of a basket of goods and services over time, serving as critical tools for economic analysis, monetary policy formulation, and adjusting wages and benefits. India primarily uses the Consumer Price Index (CPI) and historically the Wholesale Price Index (WPI) to gauge inflation.
Facts & tables
- CPI Updates
- CPI base year updated to 2024, item basket revised based on 2023-24 Household Consumption Expenditure Survey, increasing items from 299 to 358.
- WPI Updates
- WPI base year revised to 2022-23, number of items expanded from 697 to 957, and categories reorganized (e.g., crude petroleum moved to 'Fuel and Power').
- Introduction of PPI
- New Producer Price Index (PPI) introduced to accurately capture producer-level prices by tracking input and output prices separately and excluding transport and indirect taxes.
- WPI Phasing Out
- The PPI will replace the WPI entirely over the next five years, making CPI and PPI the country's two principal price indices.
| Index | Measures | Base Year (New) | Key Feature |
|---|---|---|---|
| Consumer Price Index (CPI) | Retail price changes (consumer-end) | 2024 | Reflects current household consumption patterns |
| Wholesale Price Index (WPI) | Wholesale price changes (producer-end, includes taxes/transport) | 2022-23 | To be phased out in 5 years |
| Producer Price Index (PPI) | Producer-level prices (inputs & outputs, excludes taxes/transport) | Introduced (current) | More accurate for producer prices, includes services |
| Type | Reference |
|---|---|
| Conceptual area | Indian Economy |
| Body | Role |
|---|---|
| Ministry of Statistics and Programme Implementation (MoSPI) | Releases cpi |
| Ministry of Commerce and Industry | Releases wpi and ppi |
| Reserve Bank of India (RBI) | Uses cpi for monetary policy |
Prelims angle
Prelims angle: Multi-statement analysis
Prelims angle: Conceptual understanding
- CPI base year 2024, updated consumption basket.
- WPI base year 2022-23, expanded items, to be phased out.
- PPI introduced, measures producer prices (inputs/outputs), excludes taxes/transport.
- RBI uses CPI for monetary policy.
- MoSPI releases CPI, Commerce Ministry releases WPI/PPI.
| Year | Framing tags |
|---|---|
| 2023 | Multi-statement analysis, Conceptual understanding |
| 2022 | Statement-based questions, Conceptual understanding |
| 2022 | Institutional roles and functions, Factual recall |
| 2021 | Multi-statement analysis, Conceptual understanding |
| 2020 | Multi-statement analysis, Conceptual understanding |
| 2015 | Factual recall, Terminology-based question |
| 2015 | Factual recall, Institutional roles and functions |
| 2013 | Conceptual understanding, Multi-statement analysis |
Timeline
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Indian Economy
Conceptual area
-
Prelims 2013
Conceptual understanding, Multi-statement analysis
-
Prelims 2015
Factual recall, Terminology-based question
-
Prelims 2015
Factual recall, Institutional roles and functions
-
Prelims 2020
Multi-statement analysis, Conceptual understanding
-
Prelims 2021
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
-
Why have India’s statistical databases been upgraded? | Explained
India's inflation measurement system has been significantly upgraded with revisions to CPI and WPI, and the introduction of PPI. CPI's base year is now 2024 with an updated consumption basket. WPI's base year is 2022-23 with expanded items. The new PPI, which more accurately reflects producer prices by excluding indirect taxes and transport costs, will eventually replace the WPI, making CPI and PPI the primary inflation gauges.
See also
Past papers
2013–2023 · 8 questions
In the news
Why have India’s statistical databases been upgraded? | Explained
India's inflation measurement system has been significantly upgraded with revisions to CPI and WPI, and the introduction of PPI. CPI's base year is now 2024 with an updated consumption basket. WPI's base year is 2022-23 with expanded items. The new PPI, which more accurately reflects producer prices by excluding indirect taxes and transport costs, will eventually replace the WPI, making CPI and PPI the primary inflation gauges.
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)
A rise in the general level of prices may be caused by:
1. an increase in the money supply
2. a decrease in the aggregate level of output
3. an increase in the effective demand
Select the correct answer using the codes given below.
Statement 1 is correct: According to the quantity theory of money, if the money supply increases faster than output, it leads to more money chasing the same amount of goods, causing inflation. Statement 2 is correct: When output decreases but demand remains the same, there is excess demand relative to supply, which can push prices up (cost-push inflation). Statement 3 is correct: Effective demand refers to the total demand for goods and services at a given price level. If it increases beyond the economy's productive capacity, it causes demand-pull 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.
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.
Show 3 more PYQs
With reference to Indian economy, demand pull-inflation can be caused/increased by which of the following?
1. Expansionary policies
2. Fiscal stimulus
3. Inflation-indexing wages
4. Higher - purchasing power
5. Rising interest rates
Select the correct answer using the codes given below.
Expansionary policies: Expansionary policies like increased government spending or lower interest rates can stimulate economic activity and consumer spending. This can lead to excess demand that outstrips supply, causing prices to rise. Fiscal stimulus: Similar to expansionary policies, fiscal stimulus through government spending injections can create an inflationary gap if it's excessive. Higher purchasing power: Higher purchasing power can contribute to demand-pull inflation. If people have more money to spend due to factors like wage increases or wealth accumulation, it can lead to increased demand for goods and services. Inflation-indexing wages: While inflation-indexing wages can contribute to a wage-price spiral in some cases, it's not necessarily a direct cause of demand-pull inflation. It can be a consequence of inflation rather than a primary driver. Rising interest rates: Rising interest rates generally act as a tool to cool down an economy and reduce inflation. They make borrowing more expensive and encourage saving, thereby reducing the money supply and aggregate demand. Therefore, the correct code is 1, 2, and 4.
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 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.