Why In the News?

India’s retail inflation stayed under the Reserve Bank of India’s median target of 4% for the second successive month in August, even as it inched up marginally to 3.65% from an upwardly revised 3.6% in July. August’s inflation rate is the second slowest in five years.

Chart depicting inflation rates in India

About Inflation

Inflation is the rate of increase in prices of goods and services over a given period.

In inflation the supply of money in the economy increases and purchasing power of money decreases.

Causes of Inflation

• Demand-Pull Inflation: Demand Pull inflation occurs when the demand for goods and services exceeds their supply.
• Cost-Push Inflation: Cost-push inflation is driven by an increase in the production costs for goods and services.
• Price Power Inflation: When the price of goods and services has not been increased for a long period of time.

Indices to measure inflation in India

• Wholesale Price Index (WPI)
  • It measures the average change in the prices of goods at the wholesale level (from the perspective of producers and businesses).
  • It includes a broader range of goods than the CPI.
  • It does not include services.
  • The WPI in India includes primary articles (117), fuel and power (16 articles), and manufactured products (564). Total 697 Commodities
  • The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.
  • Office of Economic Adviser, DEPARTMENT FOR PROMOTION OF INDUSTRY AND INTERNAL TRADE (DPIIT), Ministry of Commerce and Industry publishes it.
• Consumer Price Index (CPI)
  • It is a key indicator of inflation that measures changes in the average retail prices paid by consumers for a basket of goods and services over time.
  • Base Year: 2012
  • The Monetary Policy Committee (MPC) of RBI uses CPI data to control inflation.
  • The National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI) is releases, All India Consumer Price Index (CPI) on Base 2012
  • In India, there are different CPIs that cater to specific population groups:
    • CPI for Industrial Workers (CPI-IW)
    • CPI for Agricultural Laborers (CPI-AL)
    • CPI for Rural Laborers (CPI-RL)
    • CPI for Combined (CPI-C)