Inflation

What it really is

• Inflation is a continuing rise in the overall price level.
• When inflation is positive, money loses buying power over time.
• Imagine a food basket costing 100 rupees this year. If prices rise 7%, the same basket costs 107 next year, though nothing inside changed.
• Prices often rise slowly in a growing economy.
• Fast inflation makes planning harder and sharply cuts the buying power of cash.

Two indexes

• The Consumer Price Index (CPI) measures prices paid by households.
• The Wholesale Price Index (WPI) measures prices of goods traded in bulk.
• CPI includes services like rent and schooling, and gives food a heavy weight.
• WPI covers mostly goods and skips services entirely.
• Because the baskets differ, CPI and WPI can move in different directions in the same month.
• To see how inflation hits your household budget, look at CPI. It tracks retail prices of what households actually buy.

Timeline

• 2014: the RBI adopted CPI as its headline measure.
• 2015: a policy agreement followed.
• 2016: the statutory inflation-targeting system began.
• The CPI base year is now 2024=100, with 358 weighted items.
• (Sources: RBI study and PIB, 2026 CPI update.)

Demand-pull

• It happens when people have more money to spend than the economy can supply goods for.
• Too much money chases too few goods, so prices get bid up.
• It usually follows rising incomes, extra government spending or cheap, easy loans.

Cost-push

• It happens when the cost of making goods rises. An oil-price jump is one example.
• Producers pass the extra cost on to buyers.
• It can appear without any extra demand.
• A crude oil spike raises transport and fertiliser costs. That lifts the price of nearly everything that depends on them.
• To tell them apart, ask what changed first. Did people want to buy more? That is demand-pull. Did production become costlier? That is cost-push.
• Oil prices spiking worldwide is cost-push. It raises the cost of making and moving goods, not what people want to buy.

The wage-price spiral

1. Prices rise, so living costs increase.
2. Workers seek higher pay to protect buying power.
3. Some firms’ wage bills rise.
4. Some firms raise prices, and the cycle may repeat.

• It is a feedback loop. Higher prices can lead to new wage demands, and the cycle can speed up.
• This is why central banks try to act early.
• If people expect high inflation, they build it into their wage and price decisions. That can make the expectation come true.

Food in India

• Food has a large weight in India’s CPI basket.
• A weak monsoon can cut harvests and push food prices up.
• In July 2026, food inflation was 5.52%, above the 4.45% overall CPI rate.
• Higher interest rates cannot grow more crops. Food supply matters alongside the RBI’s policy.

A ₹100 basket

• Imagine a basket of everyday goods costs ₹100 today. If prices rise 10%, it costs ₹110 next year.
• Fixed income: your pension stays ₹100. The basket now costs ₹110. You buy less or find another ₹10.
• Cash at home: your ₹100 remains ₹100. It cannot buy the same basket next year. A grandmother with ₹100 in a cupboard faces exactly this.
• Bank savings: ₹100 at 6% becomes ₹106. That still falls short of ₹110.
• Fixed-rate loan: your debt follows its agreed terms. If income rises with prices, repayment may feel easier. That benefit is not guaranteed.

The bigger picture

• This is purchasing power: what your money can actually buy.
• A larger rupee balance does not always mean you can buy more.
• Food inflation hits low-income families harder. One family spends ₹60 of every ₹100 on food. Another spends ₹20. A food-price jump takes a bigger share from the first.
• Inflation’s effect depends on income, savings returns and loan terms.
• A variable-rate loan can also become costlier when interest rates rise.

The repo rate

• The RBI’s main tool is the repo rate. It is the rate at which the RBI lends short-term money to banks.
• If inflation is running high, the RBI would likely raise it.
• A higher repo rate makes bank funding costlier. Banks may raise rates on home, car and business loans.
• Costlier loans reduce spending and investment. Lower demand may ease price pressure over time.
• But this can also slow growth and hiring. The RBI must weigh these effects.

The inflation-targeting system

• India and the RBI signed a Monetary Policy Framework Agreement in 2015.
• Parliament gave inflation targeting a legal basis in 2016.
• The Monetary Policy Committee (MPC) sets the policy repo rate by majority vote.
• The target is 4% CPI inflation, with a tolerance range of 2% to 6%.
• The government kept this target through March 2031.
• (Sources: 2015 agreement and 2026 RBI deputy governor’s speech.)
• A clear public target helps people plan. It cannot stop every food or fuel shock.
• Read more: Monetary Policy and RBI Tools, Money and Banking and Money and Monetary Concepts.

Core and headline

• Headline inflation is the overall CPI number. It includes food and fuel, which jump with weather and global oil markets.
• Core inflation strips out food and fuel. It shows steady, underlying price pressure.
• Food and fuel can swing the headline sharply. Core helps show whether pressure goes beyond them.

When falling prices turn bad

• Deflation is the opposite of inflation. Prices generally fall.
• It sounds good, but sustained deflation can badly damage an economy.
• If people expect prices to keep falling, they delay purchases.
• Less spending means less demand. Firms earn less, cut output and lay off workers. That lowers demand further.
• Wages are hard to cut. So firms’ real costs rise even as prices fall, squeezing them from both sides.
• That is why central banks fear deflation almost as much as high inflation. They aim for inflation that is low but positive.

Stagflation

• Stagflation is high inflation and stagnant or falling growth together.
• Inflation often rises when demand is strong. Stagflation shows that supply shocks can raise prices while slowing growth.
• It became famous in the 1970s, when oil-price shocks raised costs everywhere and slowed growth.
• It creates a dilemma. Raising rates fights inflation but worsens the slowdown. Cutting rates helps growth but fans inflation.
• A rate change alone may not solve a supply shock.

Three traps

• Sorting a cause into the right bucket: demand-pull or cost-push.
• Fiscal stimulus and cheap credit raise demand. A sudden oil-price jump raises costs. Wage increases linked to inflation add cost pressure.
• CPI vs WPI. The RBI targets CPI, which includes services. WPI covers goods, not services.
• Direction. “How to control inflation” questions want the correct policy direction, not just proof a tool exists.
• First decide whether a question is about a cause, a measurement index or a control tool.

Five real questions

• UPSC CSP 2021: the answer is statements 1, 2 and 4. Expansionary policy, fiscal stimulus and higher purchasing power can raise demand. Wage indexation and rising interest rates do not fit. See Q12.
• UPSC CSP 2020: statements 1 and 2 are correct. CPI gives food more weight than WPI and includes services. The statement that RBI adopted WPI as its key measure is false. See Q67.
• UPSC CSP 2015: the correct choice is decreased money circulation. Less spending pressure can help control inflation. A repo-rate rise may help cool credit and demand, but effects take time. See Q87.
• UPSC CSP 2015: the Labour Bureau compiles and releases the Consumer Price Index for Industrial Workers (CPI-IW). It can inform dearness allowance calculations. The Bureau does not decide the allowance rate. See Q29 and the Labour Ministry release.
• UPSC CSP 2022: statements 1 and 2 are correct for Inflation-Indexed Bonds. They may allow lower coupon rates and protect investors against inflation uncertainty. The blanket tax-exemption claim in statement 3 is false. See Q5. Read more: Inflation-Indexed Bonds.

CPI base year revised to 2024=100

• MoSPI released the CPI series with base 2024=100 on 12 February 2026. Its July update explained the change from the old 2012 base.
• The national basket now has 358 weighted items, up from 299.
• It uses 2023–24 household spending data and covers twelve online markets.
• The new series starts in January 2026.
• Do not compare its rates directly with the old series. The basket, weights and methods all changed.
• (Source: PIB, CPI base-year update, 29 July 2026.)

August 2026 CPI and WPI

• Provisional CPI inflation was 4.82% in August 2026.
• Rural was 5.23%, urban 4.31%, and food 5.95%. July’s final rate was 4.45%.
• (Source: PIB CPI release, 14 September 2026.)
• Provisional WPI inflation was 9.92% in August, up from 9.78% in July, on the 2022–23 base.
• Fuel and power inflation rose from 20.05% to 22.93%.
• (Source: PIB WPI release, 14 September 2026.)
• CPI and WPI measure different baskets. Their rates can differ sharply without either release being wrong.
• Read more: The Money Market and SEBI.