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Inflation: Types, Measurement, and Control
July 19, 20265 min read
TOPIC CLASSIFICATION
Subject: Indian Economy Sub-area: Macroeconomic Indicators - Inflation Difficulty: Easy-Medium Weightage: High (2-3 Prelims + Mains context every year)
EXAMINER REASONING
- Trap: Assuming all inflation is bad - moderate demand-pull inflation (2-4%) is actually healthy for growth.
- Most confused: CPI vs WPI vs GDP Deflator - coverage, weights, and which RBI targets.
- Key anchor: RBI's Flexible Inflation Targeting (FIT) framework targets CPI-C inflation at 4% (±2%).
- Current affairs hook: Sticky food inflation in 2024-25 despite overall CPI moderation; core inflation at record lows; debate on CPI vs WPI as primary policy anchor.
- Mains hinge: "Inflation in India is predominantly supply-driven, yet policy response is largely monetary. Discuss the mismatch and suggest a way forward."
Core Concept
Types of Inflation
| Type | Cause | Characteristics |
|---|---|---|
| Demand-Pull | Aggregate demand > supply | Overheating economy - full employment scenario |
| Cost-Push | Input costs rise (oil, raw materials) | Supply shock - can coexist with recession (stagflation) |
| Headline Inflation | Overall CPI/WPI | Includes food & energy (volatile) |
| Core Inflation | CPI minus food & fuel | Better gauge of underlying demand... |
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