Inflation: CPI, WPI, Causes, Effects & Control Measures

What is Inflation?

Definition: A sustained increase in the general price level of goods and services in an economy over time.

Measurement: Expressed as an annual percentage change in:

• Consumer Price Index (CPI) – Measures retail inflation.
• Wholesale Price Index (WPI) – Measures wholesale inflation.

1. CPI vs WPI (Key Differences)

Feature	CPI (Consumer Price Index)	WPI (Wholesale Price Index)
Published by	Ministry of Statistics (MoSPI)	Ministry of Commerce & Industry
Base Year	2012	2011-12
Coverage	Retail prices (urban & rural)	Wholesale prices (before retail markup)
Weightage	Food (45.86%), Housing (10%)	Manufactured Goods (64%), Fuel (13%)
Used for	Monetary policy (RBI’s inflation targeting)	Business trend analysis

2. Causes of Inflation

A. Demand-Pull Inflation

When aggregate demand > aggregate supply (e.g., high consumer spending, govt stimulus).

B. Cost-Push Inflation

When production costs rise (e.g., oil price shocks, wage hikes, supply chain disruptions).

C. Built-In Inflation

Wage-price spiral (workers demand higher wages → firms raise prices → cycle continues).

Other Factors:

• Monetary factors (excess money supply).
• Fiscal deficit (govt borrowing → inflation).
• Global factors (e.g., Ukraine war → oil price rise).

3. Effects of Inflation

Positive Effects	Negative Effects
Debtors benefit (real value of debt ↓)	Fixed-income groups suffer (pensioners, salaried)
Encourages spending (avoid future price hikes)	Reduces savings & investment
Can boost growth (mild inflation is healthy)	Income inequality worsens

4. Measures to Control Inflation

A. Monetary Policy (RBI)

• Repo Rate ↑ → Loans costlier → Demand ↓
• CRR/SLR ↑ → Banks lend less → Money supply ↓
• Open Market Operations (OMO) – Selling govt bonds to absorb liquidity.

B. Fiscal Policy (Government)

• Reduce fiscal deficit (cut unnecessary spending).
• Tax reforms (GST rationalization to reduce costs).
• Subsidy management (e.g., fuel subsidies).

C. Supply-Side Measures

• Buffer stocks (for food inflation).
• Import duty cuts (e.g., edible oils during shortages).
• Improve supply chains (e.g., PM Gati Shakti).

5. Recent Trends (UPSC Prelims Focus)

• RBI’s Inflation Target: 4% (±2%) under Urjit Patel Committee (2014).
• 2023 Inflation: CPI ~5.5%, WPI ~(-)1% (due to falling fuel prices).
• Core Inflation (CPI excluding food & fuel) remains sticky.

Key Terms to Remember

• Deflation: Persistent price decrease (bad for growth).
• Stagflation: High inflation + low growth (e.g., 1970s oil crisis).
• Headline vs Core Inflation: Core excludes volatile items (food & fuel).

Conclusion

Inflation is a critical topic for UPSC Prelims (Economy). Focus on CPI-WPI differences, RBI’s role, and recent trends like core inflation.