Practice Questions on Inflation for UPSC, APPSC, TGPSC and other state PSC exams

• Range: 3-10% per year.

• Characteristics: Moderate but noticeable price rise.

• Warning sign: If unchecked, can accelerate to higher inflation.

• Policy response: Moderate tightening may be needed.

• India’s target: 4% falls in walking inflation range.

• Conducted by: Reserve Bank of India (RBI).

• Frequency: Bi-monthly (6 times a year).

• Coverage: Households in 19 cities.

• Purpose: Gauge household inflation expectations (3 months and 1 year ahead).

• Significance: Expectations influence actual inflation (self-fulfilling).

• Releasing Agency: Office of Economic Adviser (OEA), DPIIT, Ministry of Commerce and Industry.

• Not MoSPI: WPI is released by different ministry than CPI.

• Release date: 14th of every month (or next working day if holiday).

• Lag: 2-month lag (provisional figures revised after 10 weeks).

• Use: Measures wholesale price changes before goods reach consumers.

• Cause: Rise in production costs pushing prices up.

• Factors: Higher wages, raw material costs, energy prices, taxes.

• Supply side: Reduces aggregate supply, shifts AS curve leftward.

• Effect: Pushes prices up from supply/cost side.

• Example: Oil price shocks causing inflation.

• Total Items (CPI 2024): 358.

• Previous (CPI 2012): 299 items.

• Increase: 59 new items added.

• New additions: OTT subscriptions, e-commerce prices, pen drives, exercise equipment.

• Items removed: VCR/VCD/DVD player, radio, tape recorder.

• Definition: Overstatement of inflation because CPI doesn’t fully capture consumer substitution.

• Reason: Fixed basket (Laspeyres) doesn’t account for consumers switching to cheaper alternatives.

• Example: If apple price rises, consumers may buy more oranges, but CPI still uses old quantities.

• Solution: More frequent base year updates, superlative indices.

• CPI 2024: Aims to reduce this bias with updated weights.

• Key recommendation: CPI-based inflation targeting with 4% target and ±2% band.

• Other recommendations: Constitution of MPC, accountability framework.

• Implementation: RBI Act amended in 2016.

• Replaced: Multiple indicator approach with single anchor approach.

• Report: ‘Revision of Monetary Policy Framework’.

• Definition: Stagnation + Inflation occurring simultaneously.

• Characteristics: High inflation + High unemployment + Low/negative growth.

• Historical example: USA in 1970s (oil shock).

• Difficult to tackle: Traditional policies address either inflation or unemployment, not both.

• Supply shock: Often caused by supply-side disruptions.

• Recommended interval: 3 to 5 years.

• As per: Global best practices and MoSPI’s stated plan.

• Reason: Consumption patterns change with income growth, urbanization, digitalization.

• Previous gap: CPI 2012 to CPI 2024 = 12 years (too long).

• Future plan: MoSPI to institutionalize regular base revisions.

• Definition: Prices fixed/controlled by government rather than market forces.

• Examples in India: Petroleum products, LPG, fertilizers, electricity tariffs.

• Also called: Regulated prices or controlled prices.

• Impact on CPI: Changes in administered prices directly affect measured inflation.

• MSP: Minimum Support Price for crops is also an administered price.

• Uses: Base year quantities as weights.

• CPI in India: Follows Laspeyres Index methodology.

• Formula: Σ(P1 × Q0) / Σ(P0 × Q0) × 100.

• P1 = Current prices, P0 = Base prices, Q0 = Base year quantities.

• Disadvantage: Overstates inflation (substitution bias).

• Use: Compiling elementary indices (lowest level).

• Method: Geometric mean of price relatives.

• Formula: (P1/P0)^(1/n) for n items.

• Advantage: Satisfies time reversal test.

• Higher level: Weighted arithmetic mean used for aggregation.

• Used for: Deriving weights for new CPI 2024 series.

• Conducted by: National Sample Survey Office (NSSO), MoSPI.

• Purpose: Captures actual household spending patterns.

• Key finding: Food spending share declined, services share increased.

• Also used: Poverty estimation, GDP calculations.

• Uses: Current year quantities as weights.

• Formula: Σ(P1 × Q1) / Σ(P0 × Q1) × 100.

• WPI in India: Closer to Paasche methodology.

• P1 = Current prices, P0 = Base prices, Q1 = Current year quantities.

• Disadvantage: Understates inflation (accounts for substitution).

• Definition: Overstatement of inflation because CPI doesn’t fully capture consumer substitution.

• Reason: Fixed basket (Laspeyres) doesn’t account for consumers switching to cheaper alternatives.

• Example: If apple price rises, consumers may buy more oranges, but CPI still uses old quantities.

• Solution: More frequent base year updates, superlative indices.

• CPI 2024: Aims to reduce this bias with updated weights.

• Use: Compiling elementary indices (lowest level).

• Method: Geometric mean of price relatives.

• Formula: (P1/P0)^(1/n) for n items.

• Advantage: Satisfies time reversal test.

• Higher level: Weighted arithmetic mean used for aggregation.

• Classification: COICOP 2018 (Classification of Individual Consumption According to Purpose).

• Developed by: United Nations Statistics Division (UNSD).

• Structure: 12 Divisions → 43 Groups → 92 Classes → 162 Subclasses → 358 Items.

• Previous CPI 2012: Had only 6 broad groups.

• Benefit: International comparability and more granular data.

• Definition: Prices fixed/controlled by government rather than market forces.

• Examples in India: Petroleum products, LPG, fertilizers, electricity tariffs.

• Also called: Regulated prices or controlled prices.

• Impact on CPI: Changes in administered prices directly affect measured inflation.

• MSP: Minimum Support Price for crops is also an administered price.

• Definition: Slowdown in the rate of inflation (inflation declining but still positive).

• Different from Deflation: In disinflation, prices still rise but at slower rate.

• Example: Inflation falling from 8% to 4% (positive but declining).

• Desirable: Often a policy goal to bring inflation to target level.

• Method: Achieved through monetary tightening.

• January 2026 CPI inflation: 2.75% (new series base 2024).

• Rural: 2.73%, Urban: 2.77%.

• Food inflation (CFPI): 2.13%.

• Note: December 2025 (old series) was 1.33%.

• First reading: This was first inflation data under new CPI 2024 series.

• Trade-off: Inflation and Unemployment.

• Relationship: Inverse (negative) – low unemployment leads to higher inflation.

• Named after: A.W. Phillips (1958 study on UK data).

• Short-run: Trade-off exists.

• Long-run: Vertical Phillips Curve (no trade-off) – Natural Rate of Unemployment.

• Classification: COICOP 2018 (Classification of Individual Consumption According to Purpose).

• Developed by: United Nations Statistics Division (UNSD).

• Structure: 12 Divisions → 43 Groups → 92 Classes → 162 Subclasses → 358 Items.

• Previous CPI 2012: Had only 6 broad groups.

• Benefit: International comparability and more granular data.

• Purpose: Bridging two CPI series for time-series analysis and comparison.

• Method: Calculated using overlapping period (2025) when both series available.

• Formula: Ratio of geometric mean indices of new series to old series.

• Limitation: Can link only at general index level (not group-wise due to different classifications).

• Provided by: MoSPI along with new CPI release.

• Highest Weight: Manufactured Products (64.23%).

• Primary Articles: 22.62% (includes food articles, non-food articles, minerals).

• Fuel & Power: 13.15%.

• Food Articles alone: 15.26% of total WPI.

• Total items in WPI: 697 commodities.

• Definition: Slowdown in the rate of inflation (inflation declining but still positive).

• Different from Deflation: In disinflation, prices still rise but at slower rate.

• Example: Inflation falling from 8% to 4% (positive but declining).

• Desirable: Often a policy goal to bring inflation to target level.

• Method: Achieved through monetary tightening.

• Threshold: 50% per month (or 13,000% per year approximately).

• Definition by: Philip Cagan (economist).

• Characteristics: Prices double every few days/weeks.

• Historical examples: Zimbabwe (2008), Venezuela (2018), Weimar Germany (1923).

• Cause: Excessive money printing by government to finance deficits.

• New items: OTT subscriptions (Netflix, Amazon Prime, Hotstar), e-commerce prices, pen drives, exercise equipment.

• Services: Attendant and babysitter services, online streaming.

• Removed items: VCR/VCD/DVD player, radio, tape recorder (obsolete).

• Modern economy: Reflects digital transformation in consumption.

• Data sources: E-commerce platforms, OTT provider websites.

• Statement: As income rises, proportion of income spent on food declines.

• Named after: Ernst Engel (German economist, 1857).

• Application: Explains lower food weight in CPI 2024 (36.75%) vs CPI 2012 (45.86%).

• Corollary: Higher income → more spending on services, housing, leisure.

• Evidence: HCES 2023-24 data confirms this pattern in India.

• Range: 10-20% per year.

• Characteristics: Rapid and persistent price rise.

• Effect: Erodes purchasing power significantly.

• Policy response: Aggressive tightening required.

• Economic impact: Distorts savings, investment decisions.

• Food & Beverages Weight (CPI 2024): 36.75%.

• Previous weight (CPI 2012): 45.86%.

• Reduction: Approximately 9 percentage points lower.

• Reason: Reflects Engel’s Law – as income rises, proportion spent on food declines.

• Impact: Lower food weight reduces headline inflation volatility.

• Range: 10-20% per year.

• Characteristics: Rapid and persistent price rise.

• Effect: Erodes purchasing power significantly.

• Policy response: Aggressive tightening required.

• Economic impact: Distorts savings, investment decisions.

• Definition: Inflation caused by rise in prices of imported goods.

• Channels: Higher import prices → higher domestic prices.

• Examples: Oil price rise, currency depreciation increasing import costs.

• India’s vulnerability: High import dependence for crude oil.

• Rupee depreciation: Makes imports costlier, fueling imported inflation.

• CPI measures: Retail prices paid by consumers (includes taxes, retail margins).

• WPI measures: Wholesale prices (before goods reach consumers).

• CPI includes: Services (housing, education, health, transport).

• WPI excludes: Services (only covers goods).

• RBI uses: CPI for inflation targeting (not WPI).

• RBI uses: Consumer Price Index (CPI) – Combined.

• Legal basis: Section 45ZA of RBI Act 1934 (amended 2016).

• Target: 4% with tolerance band of ±2% (i.e., 2% to 6%).

• Earlier: WPI was primary focus (before 2016).

• CPI chosen: Better reflects cost of living for common people.

• Releasing Agency: National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI).

• Frequency: Monthly (around 12th of each month for previous month).

• Coverage: Rural, Urban, and Combined indices.

• Base Year (New): 2024=100 (released from February 2026).

• Previous Base Year: 2012=100 (used from January 2015 to December 2025).

• WPI Base Year: 2011-12 = 100.

• Released by: Office of Economic Adviser (OEA), Department for Promotion of Industry and Internal Trade (DPIIT).

• Frequency: Monthly (14th of each month).

• Coverage: Primary Articles + Fuel & Power + Manufactured Products.

• Does NOT include: Services (only goods at wholesale stage).

• Equation: MV = PT (or MV = PY in modern form).

• M = Money supply, V = Velocity of circulation, P = Price level, T = Volume of transactions.

• Implication: If V and T are constant, increase in M causes proportional increase in P.

• Proponent: Irving Fisher (classical economist).

• Conclusion: Inflation is always a monetary phenomenon.

• WPI inflation (Feb 2026): 0.25% (positive, month-on-month).

• Year-on-year: Around 1.0-1.5% (mildly positive).

• WPI Food Index: 1.85%.

• Previous months: WPI was negative for several months in 2025.

• Reason for low WPI: Lower prices in food articles, crude oil, basic metals.

• Definition: Total inflation including all items in CPI basket.

• Includes: Volatile items like food and fuel.

• India’s headline CPI inflation (Jan 2026): 2.75% (new CPI 2024 series).

• Used by RBI: For inflation targeting (4% ± 2% target).

• Contrast: Core inflation excludes volatile items.

• Current validity: April 2021 to March 2026.

• Extended: March 2026 – new notification extends to March 2031.

• New period: April 2026 to March 2031 (5 years).

• Target: 4% CPI inflation (same target retained).

• Band: ±2% (i.e., 2% to 6%) unchanged.

• Release Date: 12th February 2026.

• First inflation reading under new series: January 2026 (2.75%).

• Weight Reference: Household Consumption Expenditure Survey (HCES) 2023-24.

• Classification: COICOP 2018 (12 divisions, 43 groups, 92 classes, 162 subclasses).

• Total items: 358 (increased from 299 in CPI 2012).

• Method: Computer Assisted Personal Interview (CAPI) using tablet-based software.

• Previous method: Traditional paper-based collection.

• Collecting agency: Field Operations Division of National Sample Survey (NSS), MoSPI.

• Frequency: Weekly roster (prices collected on weekly basis).

• Benefit: Real-time data entry and reduced errors.

• Housing Weight (CPI 2024): 17.67%.

• Previous weight (CPI 2012): 10.07%.

• Increase: Approximately 7.6 percentage points higher.

• New feature: Rural housing now included (3,324 rural dwellings covered).

• Reflects: Increased urbanization and housing costs.

• Definition: Sustained increase in general price level over a period of time.

• Key aspects: (1) Sustained – not one-time price rise (2) General – overall price level, not individual items.

• Results in: Decline in purchasing power of money.

• Opposite: Deflation (sustained fall in general price level).

• Measured through: Price indices like CPI, WPI, GDP Deflator.

• Definition: Sustained decrease in general price level.

• Negative inflation: Prices falling continuously.

• Causes: Weak demand, excess supply, tight monetary policy.

• Dangers: Deflationary spiral – falling prices → postponed purchases → lower demand → further price falls.

• Example: Japan’s ‘Lost Decade’ (1990s-2000s).

• Definition: Excess of actual aggregate demand over potential output at full employment.

• Indicates: Economy operating above potential (overheating).

• Effect: Leads to demand-pull inflation.

• Opposite: Deflationary gap (actual demand below potential output).

• Measured by: Output gap analysis.

• Trade-off: Inflation and Unemployment.

• Relationship: Inverse (negative) – low unemployment leads to higher inflation.

• Named after: A.W. Phillips (1958 study on UK data).

• Short-run: Trade-off exists.

• Long-run: Vertical Phillips Curve (no trade-off) – Natural Rate of Unemployment.

• Purpose: Bridging two CPI series for time-series analysis and comparison.

• Method: Calculated using overlapping period (2025) when both series available.

• Formula: Ratio of geometric mean indices of new series to old series.

• Limitation: Can link only at general index level (not group-wise due to different classifications).

• Provided by: MoSPI along with new CPI release.

• Highest inflation state: Telangana (4.92%).

• National average: 2.75%.

• Variation: Significant regional differences in inflation.

• Reason: Different consumption patterns, supply conditions across states.

• Lowest: Some states had inflation below 2%.

• Uses: Current year quantities as weights.

• Formula: Σ(P1 × Q1) / Σ(P0 × Q1) × 100.

• WPI in India: Closer to Paasche methodology.

• P1 = Current prices, P0 = Base prices, Q1 = Current year quantities.

• Disadvantage: Understates inflation (accounts for substitution).

• 12 Divisions: (1) Food & Beverages (2) Alcoholic Beverages & Tobacco (3) Clothing & Footwear (4) Housing & Utilities (5) Furnishings (6) Health (7) Transport (8) Information & Communication (9) Recreation & Culture (10) Education Services (11) Restaurants & Hotels (12) Personal Care & Miscellaneous.

• Previous CPI 2012: Only 6 broad groups.

• New division: Information & Communication (separate from Transport).

• Benefit: More granular analysis possible.

• Used for: Deriving weights for new CPI 2024 series.

• Conducted by: National Sample Survey Office (NSSO), MoSPI.

• Purpose: Captures actual household spending patterns.

• Key finding: Food spending share declined, services share increased.

• Also used: Poverty estimation, GDP calculations.

• WPI Base Year: 2011-12 = 100.

• Released by: Office of Economic Adviser (OEA), Department for Promotion of Industry and Internal Trade (DPIIT).

• Frequency: Monthly (14th of each month).

• Coverage: Primary Articles + Fuel & Power + Manufactured Products.

• Does NOT include: Services (only goods at wholesale stage).

• Recommended interval: 3 to 5 years.

• As per: Global best practices and MoSPI’s stated plan.

• Reason: Consumption patterns change with income growth, urbanization, digitalization.

• Previous gap: CPI 2012 to CPI 2024 = 12 years (too long).

• Future plan: MoSPI to institutionalize regular base revisions.

• Method: Computer Assisted Personal Interview (CAPI) using tablet-based software.

• Previous method: Traditional paper-based collection.

• Collecting agency: Field Operations Division of National Sample Survey (NSS), MoSPI.

• Frequency: Weekly roster (prices collected on weekly basis).

• Benefit: Real-time data entry and reduced errors.

• Highest inflation state: Telangana (4.92%).

• National average: 2.75%.

• Variation: Significant regional differences in inflation.

• Reason: Different consumption patterns, supply conditions across states.

• Lowest: Some states had inflation below 2%.

• Release Date: 12th February 2026.

• First inflation reading under new series: January 2026 (2.75%).

• Weight Reference: Household Consumption Expenditure Survey (HCES) 2023-24.

• Classification: COICOP 2018 (12 divisions, 43 groups, 92 classes, 162 subclasses).

• Total items: 358 (increased from 299 in CPI 2012).

• Cause: Structural bottlenecks and rigidities in the economy.

• Examples: Poor infrastructure, storage gaps, distribution inefficiencies.

• India context: Agricultural supply chain issues causing food inflation.

• Different from: Demand-pull (demand side) and cost-push (cost side).

• Solution: Structural reforms, infrastructure development.

• Highest Weight: Manufactured Products (64.23%).

• Primary Articles: 22.62% (includes food articles, non-food articles, minerals).

• Fuel & Power: 13.15%.

• Food Articles alone: 15.26% of total WPI.

• Total items in WPI: 697 commodities.

• Releasing Agency: National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI).

• Frequency: Monthly (around 12th of each month for previous month).

• Coverage: Rural, Urban, and Combined indices.

• Base Year (New): 2024=100 (released from February 2026).

• Previous Base Year: 2012=100 (used from January 2015 to December 2025).

• Excluded items: Food and Fuel (volatile components).

• Reason: Food and fuel prices are volatile due to supply shocks, not demand.

• Shows: Underlying inflation trend in economy.

• Core CPI (Dec 2025): 4.8% (including precious metals) or 2.4% (excluding gold/silver).

• Use: Better indicator of demand-side pressures.

• 12 Divisions: (1) Food & Beverages (2) Alcoholic Beverages & Tobacco (3) Clothing & Footwear (4) Housing & Utilities (5) Furnishings (6) Health (7) Transport (8) Information & Communication (9) Recreation & Culture (10) Education Services (11) Restaurants & Hotels (12) Personal Care & Miscellaneous.

• Previous CPI 2012: Only 6 broad groups.

• New division: Information & Communication (separate from Transport).

• Benefit: More granular analysis possible.

• Cause: Rise in production costs pushing prices up.

• Factors: Higher wages, raw material costs, energy prices, taxes.

• Supply side: Reduces aggregate supply, shifts AS curve leftward.

• Effect: Pushes prices up from supply/cost side.

• Example: Oil price shocks causing inflation.

• Threshold: 50% per month (or 13,000% per year approximately).

• Definition by: Philip Cagan (economist).

• Characteristics: Prices double every few days/weeks.

• Historical examples: Zimbabwe (2008), Venezuela (2018), Weimar Germany (1923).

• Cause: Excessive money printing by government to finance deficits.

• Rural Markets: 1,465.

• Urban Markets: 1,395.

• Total towns covered: 434.

• Villages covered: 1,181.

• New addition: 12 designated online markets for e-commerce prices.

• Key recommendation: CPI-based inflation targeting with 4% target and ±2% band.

• Other recommendations: Constitution of MPC, accountability framework.

• Implementation: RBI Act amended in 2016.

• Replaced: Multiple indicator approach with single anchor approach.

• Report: ‘Revision of Monetary Policy Framework’.

• Conducted by: Reserve Bank of India (RBI).

• Frequency: Bi-monthly (6 times a year).

• Coverage: Households in 19 cities.

• Purpose: Gauge household inflation expectations (3 months and 1 year ahead).

• Significance: Expectations influence actual inflation (self-fulfilling).

• Housing Weight (CPI 2024): 17.67%.

• Previous weight (CPI 2012): 10.07%.

• Increase: Approximately 7.6 percentage points higher.

• New feature: Rural housing now included (3,324 rural dwellings covered).

• Reflects: Increased urbanization and housing costs.

• Food & Beverages Weight (CPI 2024): 36.75%.

• Previous weight (CPI 2012): 45.86%.

• Reduction: Approximately 9 percentage points lower.

• Reason: Reflects Engel’s Law – as income rises, proportion spent on food declines.

• Impact: Lower food weight reduces headline inflation volatility.

• Requirement: Submit written report to Central Government.

• Contents: Reasons for failure, remedial actions, estimated time to return to target.

• Legal basis: Section 45ZN of RBI Act 1934.

• Target band: 2% to 6% (failure if below 2% or above 6%).

• Accountability mechanism: Ensures RBI responsibility for price stability.

• Equation: MV = PT (or MV = PY in modern form).

• M = Money supply, V = Velocity of circulation, P = Price level, T = Volume of transactions.

• Implication: If V and T are constant, increase in M causes proportional increase in P.

• Proponent: Irving Fisher (classical economist).

• Conclusion: Inflation is always a monetary phenomenon.

• Releasing Agency: Office of Economic Adviser (OEA), DPIIT, Ministry of Commerce and Industry.

• Not MoSPI: WPI is released by different ministry than CPI.

• Release date: 14th of every month (or next working day if holiday).

• Lag: 2-month lag (provisional figures revised after 10 weeks).

• Use: Measures wholesale price changes before goods reach consumers.

• Definition: Sustained decrease in general price level.

• Negative inflation: Prices falling continuously.

• Causes: Weak demand, excess supply, tight monetary policy.

• Dangers: Deflationary spiral – falling prices → postponed purchases → lower demand → further price falls.

• Example: Japan’s ‘Lost Decade’ (1990s-2000s).

• Definition: Mild inflation of 1-3% per year.

• Characteristics: Slow, gradual price rise.

• Considered: Generally acceptable and even beneficial for growth.

• Stimulates: Investment and production (mild price rise expectations).

• Contrast: Walking (3-10%), Running (10-20%), Galloping (>20%).

• Measures: Price changes in food items specifically.

• Coverage: 10 out of 12 food sub-groups (excludes non-alcoholic beverages and prepared meals).

• Separate index: Published alongside general CPI.

• CFPI inflation (Jan 2026): 2.13%.

• Significance: Food inflation has major impact on poor households.

• Formula: (Nominal GDP / Real GDP) × 100.

• Measures: Price changes of all domestically produced goods and services.

• Coverage: Broader than CPI (covers entire economy).

• Difference from CPI: GDP Deflator covers production; CPI covers consumption.

• Implicit index: Derived from GDP data, not directly calculated from prices.

• Definition: Stagnation + Inflation occurring simultaneously.

• Characteristics: High inflation + High unemployment + Low/negative growth.

• Historical example: USA in 1970s (oil shock).

• Difficult to tackle: Traditional policies address either inflation or unemployment, not both.

• Supply shock: Often caused by supply-side disruptions.

• Rural Markets: 1,465.

• Urban Markets: 1,395.

• Total towns covered: 434.

• Villages covered: 1,181.

• New addition: 12 designated online markets for e-commerce prices.

• Current validity: April 2021 to March 2026.

• Extended: March 2026 – new notification extends to March 2031.

• New period: April 2026 to March 2031 (5 years).

• Target: 4% CPI inflation (same target retained).

• Band: ±2% (i.e., 2% to 6%) unchanged.

• January 2026 CPI inflation: 2.75% (new series base 2024).

• Rural: 2.73%, Urban: 2.77%.

• Food inflation (CFPI): 2.13%.

• Note: December 2025 (old series) was 1.33%.

• First reading: This was first inflation data under new CPI 2024 series.

• Statement: As income rises, proportion of income spent on food declines.

• Named after: Ernst Engel (German economist, 1857).

• Application: Explains lower food weight in CPI 2024 (36.75%) vs CPI 2012 (45.86%).

• Corollary: Higher income → more spending on services, housing, leisure.

• Evidence: HCES 2023-24 data confirms this pattern in India.

• CPI measures: Retail prices paid by consumers (includes taxes, retail margins).

• WPI measures: Wholesale prices (before goods reach consumers).

• CPI includes: Services (housing, education, health, transport).

• WPI excludes: Services (only covers goods).

• RBI uses: CPI for inflation targeting (not WPI).

• Definition: Sustained increase in general price level over a period of time.

• Key aspects: (1) Sustained – not one-time price rise (2) General – overall price level, not individual items.

• Results in: Decline in purchasing power of money.

• Opposite: Deflation (sustained fall in general price level).

• Measured through: Price indices like CPI, WPI, GDP Deflator.

• Statement: Nominal interest rate = Real interest rate + Expected inflation.

• Named after: Irving Fisher.

• Formula: i = r + πe (approximately).

• Implication: Higher inflation expectations lead to higher nominal interest rates.

• Real interest rate: Inflation-adjusted return on savings/investments.

• Cause: Excess aggregate demand over aggregate supply.

• Phrase: ‘Too much money chasing too few goods’.

• Factors: Increased consumer spending, government expenditure, investment, exports.

• Effect: Pulls prices up from demand side.

• Cure: Contractionary monetary and fiscal policy.

• Formula: (Nominal GDP / Real GDP) × 100.

• Measures: Price changes of all domestically produced goods and services.

• Coverage: Broader than CPI (covers entire economy).

• Difference from CPI: GDP Deflator covers production; CPI covers consumption.

• Implicit index: Derived from GDP data, not directly calculated from prices.

• Total Items (CPI 2024): 358.

• Previous (CPI 2012): 299 items.

• Increase: 59 new items added.

• New additions: OTT subscriptions, e-commerce prices, pen drives, exercise equipment.

• Items removed: VCR/VCD/DVD player, radio, tape recorder.

• Definition: Mild inflation of 1-3% per year.

• Characteristics: Slow, gradual price rise.

• Considered: Generally acceptable and even beneficial for growth.

• Stimulates: Investment and production (mild price rise expectations).

• Contrast: Walking (3-10%), Running (10-20%), Galloping (>20%).

• WPI inflation (Feb 2026): 0.25% (positive, month-on-month).

• Year-on-year: Around 1.0-1.5% (mildly positive).

• WPI Food Index: 1.85%.

• Previous months: WPI was negative for several months in 2025.

• Reason for low WPI: Lower prices in food articles, crude oil, basic metals.

• Range: 3-10% per year.

• Characteristics: Moderate but noticeable price rise.

• Warning sign: If unchecked, can accelerate to higher inflation.

• Policy response: Moderate tightening may be needed.

• India’s target: 4% falls in walking inflation range.

• Measures: Price changes in food items specifically.

• Coverage: 10 out of 12 food sub-groups (excludes non-alcoholic beverages and prepared meals).

• Separate index: Published alongside general CPI.

• CFPI inflation (Jan 2026): 2.13%.

• Significance: Food inflation has major impact on poor households.

• Definition: Excess of actual aggregate demand over potential output at full employment.

• Indicates: Economy operating above potential (overheating).

• Effect: Leads to demand-pull inflation.

• Opposite: Deflationary gap (actual demand below potential output).

• Measured by: Output gap analysis.

• Requirement: Submit written report to Central Government.

• Contents: Reasons for failure, remedial actions, estimated time to return to target.

• Legal basis: Section 45ZN of RBI Act 1934.

• Target band: 2% to 6% (failure if below 2% or above 6%).

• Accountability mechanism: Ensures RBI responsibility for price stability.

• Definition: Inflation caused by rise in prices of imported goods.

• Channels: Higher import prices → higher domestic prices.

• Examples: Oil price rise, currency depreciation increasing import costs.

• India’s vulnerability: High import dependence for crude oil.

• Rupee depreciation: Makes imports costlier, fueling imported inflation.

• Definition: Total inflation including all items in CPI basket.

• Includes: Volatile items like food and fuel.

• India’s headline CPI inflation (Jan 2026): 2.75% (new CPI 2024 series).

• Used by RBI: For inflation targeting (4% ± 2% target).

• Contrast: Core inflation excludes volatile items.

• Excluded items: Food and Fuel (volatile components).

• Reason: Food and fuel prices are volatile due to supply shocks, not demand.

• Shows: Underlying inflation trend in economy.

• Core CPI (Dec 2025): 4.8% (including precious metals) or 2.4% (excluding gold/silver).

• Use: Better indicator of demand-side pressures.

• Cause: Structural bottlenecks and rigidities in the economy.

• Examples: Poor infrastructure, storage gaps, distribution inefficiencies.

• India context: Agricultural supply chain issues causing food inflation.

• Different from: Demand-pull (demand side) and cost-push (cost side).

• Solution: Structural reforms, infrastructure development.

• Uses: Base year quantities as weights.

• CPI in India: Follows Laspeyres Index methodology.

• Formula: Σ(P1 × Q0) / Σ(P0 × Q0) × 100.

• P1 = Current prices, P0 = Base prices, Q0 = Base year quantities.

• Disadvantage: Overstates inflation (substitution bias).

• Statement: Nominal interest rate = Real interest rate + Expected inflation.

• Named after: Irving Fisher.

• Formula: i = r + πe (approximately).

• Implication: Higher inflation expectations lead to higher nominal interest rates.

• Real interest rate: Inflation-adjusted return on savings/investments.

• New items: OTT subscriptions (Netflix, Amazon Prime, Hotstar), e-commerce prices, pen drives, exercise equipment.

• Services: Attendant and babysitter services, online streaming.

• Removed items: VCR/VCD/DVD player, radio, tape recorder (obsolete).

• Modern economy: Reflects digital transformation in consumption.

• Data sources: E-commerce platforms, OTT provider websites.

• RBI uses: Consumer Price Index (CPI) – Combined.

• Legal basis: Section 45ZA of RBI Act 1934 (amended 2016).

• Target: 4% with tolerance band of ±2% (i.e., 2% to 6%).

• Earlier: WPI was primary focus (before 2016).

• CPI chosen: Better reflects cost of living for common people.

• Cause: Excess aggregate demand over aggregate supply.

• Phrase: ‘Too much money chasing too few goods’.

• Factors: Increased consumer spending, government expenditure, investment, exports.

• Effect: Pulls prices up from demand side.

• Cure: Contractionary monetary and fiscal policy.