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Quick recap: Inflation on one page

Inflation · Quick recap · Fact-checked on · how we check

Written with AI from the sources listed at the bottom of this page, then fact-checked by a separate AI.

Both parts of Inflation condensed for quick revision: price indices and who compiles them, the new CPI and WPI series, core inflation and the base effect, causes and types, who gains and loses, the inflation target under the RBI Act and the Monetary Policy Committee, with a one-table overview and eight mixed questions.

inflation is a sustained rise in the general price level, which means a fall in what each rupee can buy. It is measured with price indices: a basket of goods and services, weighted by its share in spending, priced against a base period set at 100. The rate in the news is usually year-on-year, so it carries a base effect: a high level last year makes this year's rate look low even when prices are still rising.

India has several indices, each with its own compiler and base. The NSO of MoSPI compiles the Consumer Price Index (Rural, Urban and Combined), released on the 12th of each month; its new series with base 2024=100 began with January 2026 data, uses weights from the Household Consumption Expenditure Survey 2023-24, has 358 items in 12 divisions, and gives food and beverages 36.75 per cent of the basket, down from 45.86 per cent. The Labour Bureau compiles CPI-IW (base 2016) for dearness allowance and CPI-AL and CPI-RL (base 2019) for agricultural minimum wages. The Wholesale Price Index, compiled by the Office of the Economic Adviser in DPIIT and released on the 14th, covers goods only; its new base is 2022-23 (June 2026), manufactured products carry 63.13 per cent of its weight, and producer price indices launched with it are to replace it after five years.

CPI and WPI diverge because they measure different baskets at different stages; in 2015, when world oil and metal prices fell, WPI inflation was negative for months while CPI inflation stayed positive. Since the Urjit Patel Committee's report in 2014, CPI (Combined) has been the anchor of monetary policy, because it reflects the cost of living that shapes expectations. core inflation leaves out volatile food and fuel to show the underlying trend, but it is not a separate official index and the target is set for headline CPI. The GDP deflator is the broadest measure, covering all domestic output and excluding imports, but it comes only quarterly.

Inflation at a glance
ItemKey fact
CPI (Rural, Urban, Combined)NSO, MoSPI; base 2024=100; released on the 12th
CPI-IW; CPI-AL and CPI-RLLabour Bureau; base 2016 and 2019
WPIOffice of the Economic Adviser, DPIIT; base 2022-23; goods only; released on the 14th
Core inflationCPI without food and fuel; not a separate official index
Inflation target (s.45ZA)4 per cent CPI (Combined), band 2-6 per cent; set by the Central Government with the RBI every five years
Failure (s.45ZN)Outside the band for three consecutive quarters; report to the government
MPC (s.45ZB)Six members, three external; Governor's casting vote; sets the repo rate

Prices rise through demand-pull, when spending outruns what the economy can supply, or cost-push, when costs such as crude oil, raw materials, wages or a weaker rupee push them up; supply shocks and structural bottlenecks matter especially for food, and a wage-price spiral can make inflation persist. By speed, inflation runs from creeping to walking, galloping and hyperinflation. Deflation is a falling price level, disinflation a slowing but positive rate, reflation a policy push to lift prices and output, and stagflation high inflation with stagnant output. The Phillips curve trade-off between unemployment and inflation holds at most in the short run, once expectations adjust.

Inflation redistributes purchasing power: unexpected inflation helps borrowers and hurts lenders, savers and people on fixed money incomes, and it falls hardest on the poor. The real interest rate is roughly the nominal rate minus inflation. To keep inflation low and stable, the Finance Act, 2016 wrote inflation targeting into the RBI Act, 1934, following the Urjit Patel Committee (2014) and the Monetary Policy Framework Agreement (2015). Under section 45ZA the Central Government, in consultation with the RBI, sets the target every five years: 4 per cent CPI (Combined) inflation with a band of 2 to 6 per cent, notified in 2016, retained in 2021 and retained again for 1 April 2026 to 31 March 2031. Failure means average inflation outside the band for three consecutive quarters; the RBI must then explain itself to the government under section 45ZN, as it first did in November 2022.

The Monetary Policy Committee under section 45ZB sets the policy repo rate. It has six members: the Governor (chair), the Deputy Governor in charge of monetary policy, one RBI officer nominated by the Central Board, and three external members appointed by the Central Government for four years without reappointment. It meets at least four times a year, needs four members for a quorum, and the Governor has a casting vote in a tie; minutes with each member's vote come out on the fourteenth day. Raising the repo rate cools demand, while the government acts on supply through buffer stocks and open market sales, stock limits under the Essential Commodities Act, 1955, trade measures and lower indirect taxes. The two arms work best together.

Exam traps

Recap

Practice questions

Q1. The Wholesale Price Index in India is compiled by:

  1. The National Statistics Office
  2. The Labour Bureau
  3. The Office of the Economic Adviser, DPIIT
  4. The Reserve Bank of India
Show answer

Answer: C. The Office of the Economic Adviser, DPIIT

The Office of the Economic Adviser in DPIIT, Ministry of Commerce and Industry, compiles the WPI. The NSO compiles the CPI, the Labour Bureau the CPI-IW and CPI-AL/RL, and the RBI compiles none of these indices.

Q2. Consider the following statements:
1. The current CPI series has 2024 as its base.
2. In the current CPI series, food and beverages have a larger weight than in the 2012 series.
Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Show answer

Answer: A. 1 only

Statement 1 is correct: the base is 2024=100. Statement 2 is wrong: the food and beverages weight fell from 45.86 to 36.75 per cent. So '2 only' and 'both' are wrong, and 'neither' misses statement 1.

Q3. Which one of the following indices is used to revise the dearness allowance of government employees?

  1. Wholesale Price Index
  2. Consumer Price Index for Industrial Workers
  3. Consumer Price Index for Agricultural Labourers
  4. GDP deflator
Show answer

Answer: B. Consumer Price Index for Industrial Workers

CPI-IW is used for dearness allowance. The WPI tracks wholesale goods prices, CPI-AL is used for agricultural minimum wages, and the GDP deflator converts nominal GDP to real GDP; none of these is the basis for dearness allowance.

Q4. Core inflation is calculated by excluding which of the following from the CPI?

  1. Services
  2. Food and fuel
  3. Manufactured goods
  4. Housing
Show answer

Answer: B. Food and fuel

Core inflation removes the volatile food and fuel components. Services, manufactured goods and housing all remain in core inflation, so the other options are wrong.

Q5. A situation of high inflation combined with stagnant output and high unemployment is called:

  1. Disinflation
  2. Reflation
  3. Stagflation
  4. Deflation
Show answer

Answer: C. Stagflation

This is stagflation. Disinflation is a falling but positive inflation rate, reflation is a policy push to lift prices and output, and deflation is a fall in the price level; none combines high inflation with stagnation.

Q6. Consider the following statements:
1. The inflation target under the RBI Act is determined once every five years.
2. The target for 2026-2031 was raised to 5 per cent CPI inflation.
Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Show answer

Answer: A. 1 only

Statement 1 is correct under section 45ZA. Statement 2 is wrong: the target was retained at 4 per cent with a 2-6 per cent band for 1 April 2026 to 31 March 2031. So '2 only' and 'both' are wrong, and 'neither' misses statement 1.

Q7. With reference to the Monetary Policy Committee, which of the following statements is correct?

  1. It is chaired by the Union Finance Minister.
  2. Its external members may be reappointed for a second term.
  3. It must meet at least four times a year.
  4. Its decisions require a unanimous vote.
Show answer

Answer: C. It must meet at least four times a year.

The RBI Act requires at least four meetings a year. The MPC is chaired by the RBI Governor, not the Finance Minister; external members cannot be reappointed; and decisions are by majority, with the Governor's casting vote in a tie, not by unanimity.

Q8. Which of the following would usually lose from inflation that is higher than expected?
1. A pensioner receiving a fixed money pension
2. A borrower who took a loan at a fixed interest rate
3. A bank that lent at a fixed interest rate
Select the correct answer using the code given below:

  1. 1 and 2 only
  2. 1 and 3 only
  3. 2 and 3 only
  4. 1, 2 and 3
Show answer

Answer: B. 1 and 3 only

The pensioner and the lending bank lose, because the money they receive buys less. The borrower gains, since the loan is repaid in rupees of lower value, so every option that includes 2 is wrong.

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