Inflation is a sustained rise in the general level of prices of goods and services over time. When prices rise, the purchasing power of money falls, meaning each rupee buys less. Inflation types, causes and the indices used to measure it appear regularly in exams.
Types of Inflation
- Demand-pull inflation - too much demand chases too few goods.
- Cost-push inflation - rising costs of inputs like fuel or wages push up prices.
- Creeping, walking, galloping and hyperinflation - based on the speed of price rise.
- Deflation - a fall in the general price level.
- Disinflation - a slowdown in the rate of inflation.
- Stagflation - high inflation with high unemployment and slow growth together.
Causes of Inflation
- Excess money supply in the economy.
- High demand and low supply of goods.
- Rise in production costs and fuel prices.
- Hoarding and black marketing.
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Measuring Inflation in India
- Wholesale Price Index (WPI) - tracks prices at the wholesale level; released by the Office of the Economic Adviser.
- Consumer Price Index (CPI) - tracks retail prices paid by consumers; released by the NSO.
- The RBI uses CPI as the main measure for setting monetary policy.
- The RBI's inflation target is 4 percent, with a band of 2 to 6 percent.
Effects of Inflation
- Hurts fixed-income groups and savers.
- Benefits borrowers as the real value of debt falls.
- Reduces real wages and can lower the standard of living.
Quick Revision Points
- Inflation = sustained rise in prices; money loses value.
- Demand-pull = excess demand; cost-push = higher costs.
- Stagflation = inflation + unemployment together.
- WPI by Office of Economic Adviser; CPI by NSO.
- RBI uses CPI; target 4 percent (2-6 percent band).
- Inflation hurts savers, helps borrowers.