Inflation: Definition, Types, CPI and WPI, Consequences, Control and the Growth Trade-off for RBI Grade B Finance
Last updated: 2026-11-13 · MockMentor
The last line of the General Topics unit in the RBI Grade B Phase 2 Finance syllabus reads: "Inflation: Definition, trends, estimates, consequences and remedies (control): Wholesale Price Index (WPI), Consumer Price Index (CPI): components and trends; striking a balance between inflation and growth through monetary and fiscal policies." It is home ground for a central bank whose primary objective is price stability, so questions range from the components of the CPI to the Phillips curve and the trade-off between inflation and growth. With CPI inflation rising to 5.54% and WPI inflation to 11.39% in September 2026, it is also one of the most current topics.
In one line: inflation is a sustained rise in the general price level; India measures it mainly through the CPI (now on a 2024 base), which RBI targets at 4% within a band of 2% to 6%, and controls it through monetary policy supported by fiscal and supply-side measures.
Basic concepts
- Inflation: a sustained rise in the general price level of goods and services over a period, which reduces the purchasing power of money.
- Inflation rate: the percentage change in a price index over a period, usually compared with the same month a year earlier (year-on-year).
- Deflation: a sustained fall in the general price level.
- Disinflation: a fall in the rate of inflation; prices still rise, but more slowly.
- Reflation: a deliberate policy to raise prices and output after a slump.
- Headline inflation: inflation measured by the full price index.
- Core inflation: inflation excluding volatile items, usually food and fuel; it shows the underlying trend.
Why in News?
- CPI inflation rose to 5.54% in September 2026, a 23-month high, from 4.83% in August, with food inflation at 7.74%. The figures use the new series with base year 2024.
- WPI inflation rose to 11.39% in September 2026 from 9.92% in August, driven by a sharp rise in fuel and power prices and higher food and manufactured product prices.
- RBI raised the repo rate by 25 basis points to 5.50% in October 2026 and changed its stance to "calibrated tightening", projecting CPI inflation of 5.2% for 2026-27.
- MoSPI launched the new CPI series with base year 2024 in February 2026, based on the Household Consumption Expenditure Survey 2023-24, with a lower weight for food and more items and markets.
Types of inflation
By rate
| Type | Meaning |
|---|---|
| Creeping inflation | Mild inflation of up to about 3% a year; often seen as healthy |
| Walking or trotting inflation | Moderate inflation of about 3% to 10% |
| Galloping or running inflation | High inflation in double digits, which hurts savings and planning |
| Hyperinflation | Extremely rapid inflation, often defined as more than 50% a month, as in Germany (1923), Zimbabwe (2008) and Venezuela (2018) |
By cause
| Type | Cause | Example |
|---|---|---|
| Demand-pull inflation | Aggregate demand exceeds supply at full employment; "too much money chasing too few goods" | Rapid credit growth or a large fiscal stimulus |
| Cost-push inflation | Rising costs of production push up prices | Higher oil prices, wages or raw material costs |
| Built-in (wage-price spiral) inflation | Workers demand higher wages to keep up with prices; firms raise prices to cover wages | Indexed wages in a tight labour market |
| Structural inflation | Supply bottlenecks in sectors such as agriculture, infrastructure and storage | Seasonal spikes in vegetable prices |
| Imported inflation | Rising prices of imports, often because of a weaker currency | Oil and edible oil price rises |
| Monetary inflation | Excess growth of money supply over output | Monetising large deficits |
Other terms
| Term | Meaning |
|---|---|
| Stagflation | High inflation with stagnant growth and high unemployment, as in the 1970s oil shocks |
| Skewflation | Prices of a few items rise sharply while others are stable, such as onions or tomatoes |
| Headline vs core | Headline includes all items; core excludes food and fuel |
| Inflation tax | The loss of purchasing power of money held by people, which benefits the government as issuer of money and as a debtor |
| Shrinkflation | Smaller pack sizes at the same price |
| Greedflation | Price rises driven by expanding profit margins rather than costs |
| Base effect | The effect of the previous year's price level on the current inflation rate; a low base raises the measured rate |
Base effect example
If the index was 100 in September last year, 102 in August this year and 103 in September this year, inflation for September is 3%. If the index had jumped to 104 in September last year (a high base), the same 103 would show inflation of about −1%. The base can make inflation look high or low even when current price changes are small.
Measuring inflation in India
Consumer Price Index (CPI)
The CPI measures changes in retail prices of a basket of goods and services consumed by households.
| Feature | New series (base 2024) |
|---|---|
| Compiled by | National Statistics Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI) |
| Released | 12th of each month (next working day if a holiday) |
| Versions | CPI-Rural, CPI-Urban and CPI-Combined; CPI-Combined is the headline measure used by RBI |
| Basket weights | Based on the Household Consumption Expenditure Survey 2023-24 |
| Food and beverages weight | Lower than the 45.86% of the 2012 series, reflecting the smaller share of food in household budgets |
| Coverage | 308 goods and 50 services (up from 259 and 40); more rural and urban markets; e-commerce prices from 12 online markets |
| Groups | Expanded from 6 to 12 divisions, aligned with the international Classification of Individual Consumption by Purpose |
| New items | Streaming and online media services, value-added dairy products, rural housing and others |
The earlier series used 2012 as the base. Other CPIs are compiled for specific groups by the Labour Bureau: CPI for Industrial Workers (CPI-IW, base 2016, used for dearness allowance) and CPI for Agricultural Labourers and Rural Labourers (CPI-AL and CPI-RL).
Wholesale Price Index (WPI)
| Feature | Detail |
|---|---|
| Compiled by | Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry |
| Base year | 2011-12 (a revision to a more recent base is under way) |
| Released | Monthly, usually on the 14th |
| Coverage | Goods only, no services; prices at the wholesale or first point of bulk sale |
| Major groups | Primary articles (about 22.6%), fuel and power (about 13.2%) and manufactured products (about 64.2%) |
| Items | 697 items |
| Taxes | Excludes indirect taxes |
CPI and WPI compared
| Basis | CPI | WPI |
|---|---|---|
| Prices | Retail, paid by consumers | Wholesale, at first point of sale |
| Services | Included | Not included |
| Largest weight | Food (in the old series), and consumption goods and services | Manufactured products |
| Taxes | Included | Excluded |
| Used for | RBI's inflation target, wage and pension indexation | Measuring producer price trends and deflating some GDP figures |
RBI moved from WPI to CPI as its main measure in 2014, on the recommendation of the Urjit Patel Committee, because CPI reflects the cost of living and inflation expectations of households better.
GDP deflator
The GDP deflator = (Nominal GDP ÷ Real GDP) × 100. It covers all goods and services produced in the economy, not just a basket, but is available only quarterly and with a lag. India's new GDP series uses 2022-23 as its base year.
Producer Price Index
A Producer Price Index (PPI), measuring prices received by producers of goods and services, has been in development as an eventual replacement for the WPI, in line with international practice.
Trends in inflation in India
| Period | Trend |
|---|---|
| 1970s | High inflation from oil shocks and droughts, reaching above 25% in 1974 |
| 1991 | Inflation above 13% during the balance of payments crisis |
| 2000s | Moderate inflation, 4% to 6% |
| 2009 to 2013 | High CPI inflation, often near or above 10%, driven by food prices, fiscal stimulus and a weak rupee |
| 2014 to 2019 | Falling inflation after inflation targeting, low oil prices and good harvests |
| 2020 to 2022 | Rise to above 7% after COVID-19 supply shocks and the Russia-Ukraine war |
| 2024 to early 2026 | Inflation fell sharply, below 2% in some months of 2025, on low food prices; CPI was 2.75% in January 2026 |
| Mid to late 2026 | Rising again, with CPI at 5.54% and WPI at 11.39% in September 2026, led by fuel, power and food |
Food inflation in India is volatile because of weather shocks, seasonal supply and storage gaps. Vegetables, pulses and edible oils often cause spikes.
Causes of inflation in India
- Food supply shocks from weak monsoons, heat waves and floods.
- Global commodity prices, especially crude oil, which India mostly imports.
- Depreciation of the rupee, which raises import costs.
- Strong demand from credit growth, government spending or a pick-up in consumption.
- Supply-chain and infrastructure bottlenecks, such as poor storage and transport.
- Increases in administered prices, such as fuel taxes and electricity tariffs.
- Rising minimum support prices for crops.
- Inflation expectations, which can become self-fulfilling.
Consequences of inflation
Effects on different groups
| Group | Effect |
|---|---|
| Fixed income earners and pensioners | Lose, as real income falls |
| Savers | Lose if interest rates are below inflation (negative real rates) |
| Borrowers | Gain, as the real value of debt falls |
| Lenders | Lose, for the same reason |
| Businesses | May gain from higher prices in the short run, but face uncertainty |
| Government | Gains as a debtor and through higher tax collections |
| The poor | Hit hardest, since they spend most of their income on food and essentials and hold cash |
Effects on the economy
- Moderate inflation can encourage production and investment and ease adjustments in wages.
- High inflation reduces savings, distorts investment towards real estate and gold, weakens export competitiveness, widens the current account deficit, creates uncertainty and worsens inequality.
- Deflation is also harmful: people delay spending, debt burdens rise and growth slows, as Japan experienced.
Measures to control inflation
Monetary measures (RBI)
| Tool | How it reduces inflation |
|---|---|
| Raising the repo rate | Raises borrowing costs and reduces demand |
| Raising CRR | Absorbs liquidity from banks |
| Open market sales of bonds | Removes money from the system |
| Raising the SDF rate and variable rate reverse repo auctions | Absorbs surplus liquidity |
| Changing the stance to tightening | Signals higher rates and anchors expectations |
| Macroprudential measures | Higher risk weights on consumer loans to slow credit |
Fiscal measures (government)
- Reducing the fiscal deficit and government spending.
- Raising direct taxes to reduce disposable income (rarely used for inflation).
- Cutting excise duty and import duty on essential goods, such as fuel and edible oils.
- Public borrowing that absorbs savings.
Supply-side and administrative measures
- Releasing stocks of food grains and pulses through open market sales and the public distribution system.
- Banning or restricting exports of items in short supply, such as onions, wheat or rice.
- Stock limits on traders to prevent hoarding.
- Imports to increase domestic supply.
- Investment in storage, cold chains and transport.
- Price Stabilisation Fund for pulses and vegetables.
Inflation targeting in India
The RBI Act was amended in 2016 to set up flexible inflation targeting.
| Feature | Detail |
|---|---|
| Target | CPI inflation of 4%, with a band of 2% to 6% |
| Set by | The central government in consultation with RBI, every five years |
| Decision body | Six-member Monetary Policy Committee |
| Failure | If inflation is above 6% or below 2% for three consecutive quarters, RBI must report to the government with reasons and remedial actions |
| Communication | Policy resolutions, minutes after two weeks and a Monetary Policy Report twice a year |
RBI had to send such a report once, in November 2022, after inflation stayed above 6% for three quarters in 2022.
Striking a balance between inflation and growth
The Phillips curve
A. W. Phillips (1958) found an inverse relation between wage inflation and unemployment in the United Kingdom. The short-run Phillips curve suggests that lower unemployment comes with higher inflation, and vice versa. In the long run, Milton Friedman and Edmund Phelps argued that the curve is vertical at the natural rate of unemployment: attempts to keep unemployment below that rate only raise inflation. Modern central banks therefore aim for low and stable inflation, which supports growth in the long run.
Monetary and fiscal coordination
| Situation | Policy mix |
|---|---|
| High inflation with strong growth | Tighter monetary policy and fiscal consolidation |
| High inflation from a supply shock | Supply-side measures and tax cuts on fuel; monetary policy looks through short shocks unless expectations rise |
| Low inflation with weak growth | Rate cuts and higher public investment |
| Stagflation | Difficult: supply-side reforms, with careful monetary policy to keep expectations anchored |
Debate on the right level of inflation
| View | Argument |
|---|---|
| Keep a low target of 4% | Protects the poor and savers, anchors expectations and maintains RBI's credibility |
| Allow somewhat higher inflation | A developing economy needs room for growth; food price shocks are outside RBI's control |
| Target core rather than headline | Monetary policy cannot fix food supply; some economists, including in the Economic Survey 2023-24, suggested excluding food |
| Keep headline | Food is a large share of household spending and drives expectations |
The new CPI series, with a lower food weight, may reduce some of the volatility in headline inflation over time.
Challenges
- Frequent food and fuel supply shocks.
- Climate change, which raises the frequency of weather shocks to farm output.
- Imported inflation through oil, gold, edible oils and a weaker rupee.
- Transmission of monetary policy to lending and deposit rates.
- Measuring inflation correctly as consumption patterns change.
Way forward
- Keep the inflation targeting framework credible, with clear communication.
- Invest in agricultural productivity, irrigation, storage and food processing to reduce food price volatility.
- Diversify energy sources to reduce oil dependence.
- Coordinate fiscal and monetary policy, with prudent deficits.
- Revise price indices regularly, including a new WPI base and a producer price index.
- Use targeted subsidies to protect the poor during price spikes.
Possible exam and interview questions
- Explain the difference between demand-pull and cost-push inflation. How should policy respond to each? (620 words)
- Compare the CPI and the WPI. Why did RBI adopt CPI-based inflation targeting, and what changed with the new CPI series of 2024? (420 words)
- What is the base effect? Explain with an example.
- Explain the Phillips curve and its relevance for monetary policy in India.
- Interview: Should RBI target core inflation instead of headline inflation?
Related reading: monetary policy, functions of RBI, and Union Budget concepts.
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