📑 Topics on this page (Jump to Topic):
📌 1. Inflation: Meaning & Types
Inflation = a sustained rise in the general price level, which reduces the purchasing power of money.
| Type | Meaning |
|---|---|
| Demand-pull | Aggregate demand exceeds supply — "too much money chasing too few goods" |
| Cost-push | Rising wages, raw material or fuel costs |
| Creeping | Very slow, below about 3% a year |
| Galloping | Fast, in double or triple digits |
| Hyperinflation | Out of control, extremely fast (e.g. Zimbabwe 2008) |
| Stagflation | High inflation + stagnant growth + high unemployment |
📌 2. Related Terms
| Term | Meaning |
|---|---|
| Deflation | A fall in the general price level (negative inflation) |
| Disinflation | The inflation rate slows, but prices still rise |
| Reflation | Deliberately raising demand/prices to come out of a slump |
| Headline inflation | Inflation of the whole basket |
| Core inflation | Excluding food and fuel (volatile items) |
| Skewflation | Prices of only a few items rising sharply |
- Phillips curve: a short-run inverse relation between inflation and unemployment.
- Fisher's quantity theory of money: MV = PT.
📌 3. Effects of Inflation
| Group | Effect |
|---|---|
| Debtors | Gain — money repaid is worth less in real terms |
| Creditors | Lose |
| Fixed-income earners (pensioners, salaried) | Lose — real income falls |
| Producers/traders | Usually gain (prices rise before costs) |
| Exports | Become less competitive as domestic goods get costlier |
- Control: monetary (raise repo/CRR, sell in OMO) and fiscal (cut government spending, raise taxes) measures; boost supply.
- Real interest rate ≈ nominal interest rate − inflation rate.
📌 4. Price Indices in India
| Index | Compiled by | Base year |
|---|---|---|
| Consumer Price Index (CPI — rural, urban, combined) | NSO, MoSPI | 2024 (from 12 February 2026; earlier 2012) |
| Wholesale Price Index (WPI) | Office of the Economic Adviser, DPIIT | 2022-23 (from 15 June 2026; earlier 2011-12) |
| Producer Price Index (PPI) | Office of the Economic Adviser, DPIIT | 2022-23 (new, June 2026) |
| CPI-Industrial Workers (CPI-IW) | Labour Bureau | 2016 |
| CPI-Agricultural/Rural Labourers (CPI-AL/RL) | Labour Bureau | 2019 |
- The new CPI (base 2024) has 358 items (earlier 299), weights from HCES 2023-24, and also covers 12 online markets.
- CPI includes services; WPI covers only goods (no services). RBI's inflation target uses CPI (combined).
- CPI-IW is used to set dearness allowance (DA) for government employees.
- The new WPI will run alongside the PPI for five years; the IIP (base 2022-23) now uses the Output PPI as its deflator.
⚠️ Exam Traps:
- In disinflation prices do not fall; only the speed of their rise slows.
- WPI does not include services — "WPI measures services" is wrong.
- CPI's new base year is 2024, while WPI/IIP/GDP use 2022-23.
- Inflation helps debtors, not creditors.
💡 Memory Tip: Stagnation + inflation = stagflation; disinflation = slower; deflation = falling prices.
📌 5. Practice MCQs
📝 Practice MCQs (prepared by SF Prep — not PYQs)
Q1. What does inflation do to the purchasing power of money? Practice
Correct answer: (D)
When prices rise, the same money buys fewer goods.
When prices rise, the same money buys fewer goods.
Q2. "Too much money chasing too few goods" describes which inflation? Practice
Correct answer: (B)
When aggregate demand exceeds supply, demand-pull inflation occurs.
When aggregate demand exceeds supply, demand-pull inflation occurs.
Q3. Inflation caused by rising crude oil prices is: Practice
Correct answer: (B)
Higher input costs such as fuel make producers raise prices — cost-push.
Higher input costs such as fuel make producers raise prices — cost-push.
Q4. High inflation together with stagnation and high unemployment is called: Practice
Correct answer: (C)
Stagnation + inflation = stagflation (e.g. the 1970s oil crisis).
Stagnation + inflation = stagflation (e.g. the 1970s oil crisis).
Q5. A falling rate of inflation while prices still rise is called: Practice
Correct answer: (D)
For example inflation falling from 6% to 4% — prices still rise, only more slowly.
For example inflation falling from 6% to 4% — prices still rise, only more slowly.
Q6. A fall in the general price level is called: Practice
Correct answer: (A)
Deflation = negative inflation; prices actually fall.
Deflation = negative inflation; prices actually fall.
Q7. Core inflation excludes: Practice
Correct answer: (D)
Food and fuel prices are very volatile, so core inflation leaves them out.
Food and fuel prices are very volatile, so core inflation leaves them out.
Q8. The Phillips curve shows the relation between: Practice
Correct answer: (A)
In the short run higher inflation goes with lower unemployment — an inverse relation. (Tax rate-revenue = Laffer curve)
In the short run higher inflation goes with lower unemployment — an inverse relation. (Tax rate-revenue = Laffer curve)
Q9. Who gains during inflation? Practice
Correct answer: (B)
The money debtors repay has lost real value.
The money debtors repay has lost real value.
Q10. Who compiles CPI (rural, urban, combined) in India? Practice
Correct answer: (C)
CPI (rural/urban/combined) is compiled by NSO, MoSPI; CPI-IW by the Labour Bureau.
CPI (rural/urban/combined) is compiled by NSO, MoSPI; CPI-IW by the Labour Bureau.
Q11. What is the base year of the new CPI series (from February 2026)? Practice
Correct answer: (C)
The new CPI series with base 2024=100 was released on 12 February 2026.
The new CPI series with base 2024=100 was released on 12 February 2026.
Q12. Who compiles the Wholesale Price Index (WPI)? Practice
Correct answer: (D)
WPI and the new PPI are compiled by the Office of the Economic Adviser, DPIIT, Ministry of Commerce and Industry.
WPI and the new PPI are compiled by the Office of the Economic Adviser, DPIIT, Ministry of Commerce and Industry.
Q13. What is the base year of the new WPI series (June 2026)? Practice
Correct answer: (A)
From 15 June 2026 WPI and PPI use base year 2022-23; the old 2011-12 series stopped.
From 15 June 2026 WPI and PPI use base year 2022-23; the old 2011-12 series stopped.
Q14. What is a key difference between WPI and CPI? Practice
Correct answer: (B)
WPI measures only goods at the wholesale level; CPI covers goods and services at retail.
WPI measures only goods at the wholesale level; CPI covers goods and services at retail.
Q15. Dearness allowance (DA) of government employees is linked to which index? Practice
Correct answer: (A)
The Labour Bureau's CPI-Industrial Workers (base 2016) is used to set DA.
The Labour Bureau's CPI-Industrial Workers (base 2016) is used to set DA.
Q16. Which is a fiscal measure to control inflation? Practice
Correct answer: (C)
Fiscal policy concerns government taxes and spending; repo, CRR and OMO are monetary tools.
Fiscal policy concerns government taxes and spending; repo, CRR and OMO are monetary tools.
Q17. If the nominal interest rate is 8% and inflation is 5%, the real interest rate is about: Practice
Correct answer: (D)
Real interest ≈ nominal − inflation = 8 − 5 = 3%.
Real interest ≈ nominal − inflation = 8 − 5 = 3%.
Q18. Fisher's quantity theory of money is shown by: Practice
Correct answer: (B)
M = money supply, V = velocity, P = price level, T = transactions.
M = money supply, V = velocity, P = price level, T = transactions.
Q19. How many items are in the new CPI (base 2024)? Practice
Correct answer: (B)
Items rose from 299 to 358 (308 goods, 50 services); weights are based on HCES 2023-24.
Items rose from 299 to 358 (308 goods, 50 services); weights are based on HCES 2023-24.
Q20. A sharp rise in the prices of only a few items (such as onions) is called: Practice
Correct answer: (C)
In skewflation the price rise is limited to (skewed towards) a few items.
In skewflation the price rise is limited to (skewed towards) a few items.