8. Inflation
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8. Inflation
8.1 What is Inflation?
Inflation is a sustained rise in the general price level, which reduces the purchasing power of money. It is measured as the percentage change in a price index over a year.
Related terms
Term |
Meaning |
Deflation |
A fall in the general price level |
Disinflation |
A fall in the rate of inflation; prices still rise, but more slowly |
Reflation |
Deliberate policy to raise prices after a period of deflation |
Stagflation |
High inflation together with high unemployment and slow growth |
Skewflation |
Prices of only some commodities rise sharply while others stay stable |
Headline inflation |
Inflation based on the full basket of goods and services |
Core inflation |
Headline inflation excluding food and fuel, which are volatile |
Base effect |
A low (or high) price level in the previous year makes this year's inflation look high (or low) |
Shrinkflation |
Pack size is reduced while the price stays the same |
Types by speed of price rise
Type |
Description |
Creeping |
Mild and slow, up to about 3% a year |
Walking |
Moderate, around 3% to 10% a year |
Running (galloping) |
High, in double digits |
Hyperinflation |
Extremely rapid price rise, such as in Germany in the 1920s and Zimbabwe in the 2000s |
8.2 Causes of Inflation
Type |
Cause |
Demand-pull |
Total demand rises faster than supply: "too much money chasing too few goods" |
Cost-push |
Higher input costs (wages, raw materials, oil) push up the prices firms charge |
Structural |
Supply bottlenecks and poor storage, transport or marketing, especially for food |
Imported inflation |
A rise in global commodity prices, such as crude oil, or a weaker rupee |
Wage-price spiral |
Higher wages raise costs and prices, which then lead to demands for still higher wages |
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8.3 Effects of Inflation
Group |
Effect |
Borrowers |
Gain, because they repay in money that is worth less |
Lenders and savers |
Lose, especially if the interest rate is lower than inflation |
Fixed-income earners |
Lose purchasing power; the poor are hit hardest because they spend more on food |
Exports |
Become costlier and less competitive |
Investment |
High and unpredictable inflation makes planning difficult |
8.4 Measuring Inflation in India
Index |
Compiled by |
Key Point |
CPI (Combined) |
National Statistics Office (NSO), MoSPI |
The main measure of retail inflation and the RBI's target |
CPI-IW |
Labour Bureau |
For industrial workers; used for Dearness Allowance of government employees |
CPI-AL and CPI-RL |
Labour Bureau |
For agricultural and rural labourers |
WPI |
Office of the Economic Adviser, DPIIT |
Wholesale prices of goods only; no services |
GDP deflator |
NSO, MoSPI |
Covers all goods and services in the economy |
New CPI series (base year 2024)
MoSPI released the new CPI series with base year 2024 (2024 = 100) on 12 February 2026, replacing the earlier 2012 base.
Weights come from the Household Consumption Expenditure Survey (HCES) 2023-24.
The basket now has 358 items (earlier 299) and follows the UN COICOP 2018 classification, with 12 divisions.
The weight of food and beverages fell from about 45.86% to 36.75%, and the weight of housing rose to about 17.67%.
New items such as OTT subscriptions, smartphones and internet data packs are included.
New WPI series (base year 2022-23)
The Office of the Economic Adviser, DPIIT, released the revised WPI with base year 2022-23 on 15 June 2026, replacing the 2011-12 series.
Items increased from 697 to 957, and weights now use the Gross Value of Output.
Alongside it, the Government launched Producer Price Indices (PPI): Output PPI, trial Input PPI and Service PPI.
The WPI will be released for five more years and then discontinued, as India moves from WPI to PPI, the global practice.
Why the base year matters
A base year is the reference year with index value 100. Revising it keeps the basket and weights in line with how people spend now.
The GDP base year was also revised, from 2011-12 to 2022-23, in the new series released on 27 February 2026.
8.5 Inflation Targeting in India
India adopted flexible inflation targeting in 2016, using CPI (Combined).
The Government, in consultation with the RBI, notified on 25 March 2026 that the target stays at 4% with a tolerance band of ±2% (2% to 6%) for 1 April 2026 to 31 March 2031.
The target was first set for 2016 to 2021, retained in 2021, and retained again in 2026.
The Monetary Policy Committee (MPC) sets the repo rate to meet the target.
If inflation stays outside the band for three consecutive quarters, the RBI must report to the Government with reasons and remedial action.
8.6 Controlling Inflation
Measure |
Tools |
Monetary |
Raising the repo rate and CRR; selling government securities through OMO to remove liquidity |
Fiscal |
Cutting government spending, raising taxes, reducing the fiscal deficit |
Supply-side |
Buffer stocks, imports, stock limits, and cutting duties on essentials; the Price Stabilisation Fund (2014-15) buys pulses and onions in bulk |
Administrative |
Using the Essential Commodities Act, 1955 to limit hoarding; Open Market Sale Scheme (OMSS) by FCI to sell grain from its stocks |
Because much Indian inflation comes from food prices, supply-side measures often matter as much as RBI action.
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