• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

ClearIAS

UPSC: Latest News, IAS, IPS, UPSC Online Preparation

UPSC Prelims Test Series 2021Enroll Now
  • Home
  • Start
    • IAS
    • IAS Exam Eligibility
    • UPSC
    • UPSC Syllabus
    • UPSC Exam Date
    • UPSC Results
    • FAQs
  • Programs
    • Prelims
    • Mains
    • Interview
  • Buy
    • Courses
    • Mock Test Series
    • IAS Books
    • eBooks (PDF)
  • Free
    • Study Materials
    • Guidance
    • eBooks (PDFs)
    • Mock Exams
    • ClearIAS App
    • Downloads
  • Toppers
  • Blog
  • Login
ClearIAS » Economics Notes » Inflation : Definition, WPI, CPI, Measurement and Causes

Inflation : Definition, WPI, CPI, Measurement and Causes

Last updated on February 9, 2020 by Alex Andrews George

Inflation is defined as a situation where there is sustained, unchecked increase in the general price level and a fall in the purchasing power of money. Thus, inflation is a condition of price rise. The reason for price rise can be classified under two main heads : (1) Increase in demand (2) Reduced supply.

Inflation explained with an example

Suppose for Rs.100, last week you bought 5 Kg. of rice. This means that the cost of 1Kg of rice was Rs. 20. This week when you approached the same shop-keeper and paid Rs.100 to get rice, he gave only 4 Kg of rice. He also explained that the price of rice has increased, and now it is Rs.25 per Kg.

This example clearly explains the fall in the purchasing power of money. For Rs. 100 you could get 5 Kg rice before, but now only 4 Kg. So purchasing power of money got reduced. This is inflation. And let’s us calculate the inflation rate (percentage). If price of rice, which was Rs.20 per Kg increased to Rs.25, this corresponds to Rs.5 increase on Rs.20, ie. 25% increase. So the inflation rate is 25%, which is obviously a very high rate.

Problems with Inflation

Having understood what inflation really is, let’s ponder what effects can inflation cause in an economy? Is inflation that bad? High rates of inflation is bad because, it can eat up hard-earned money of ordinary people. Life of common man will become tough. His savings will soon be exhausted, unless his investments offer high rate of return than the inflation rate present in the country.

Inflation Rates in India

There are different indices in India like Wholesale Price Index(WPI), Consumer Price Index(CPI) etc which measure inflation rates in India. But what we generally find in headlines as inflation rate in India is Inflation rate based on WPI. In the last 50 years, WPI based inflation rate shows an average inflation rate around 7-8%. The highest inflation rate observed in India was 34.68 Percent in September of 1974. The lowest rate touched was -11.31 Percent in May of 1976 ( a case of deflation).

Inflation in India

130+ Prelims Marks is Possible. Only if you are guided the right way.

Join ClearIAS Prelims Test Series 2021.

Take a Free Test

How to measure Inflation rate?

Unchecked inflation can ruin the whole economy. There are many examples from African and South American economies which got shattered by the high inflation rates. But who measures inflation rate in India? And what are they types of Inflation indices in India? Let’s study each of them.

Inflation can be measured at three levels – producer, wholesaler and retailer (consumer). Prices generally rise in each level till the commodity finally reach the hand of consumer.

Inflation at Producer Level

As of now in India, there is no index to measure inflation at producer level. A Producer Price Index (PPI) is proposed, but so far this type of inflation calculation has not started in India.

Inflation at Wholesale Level

This is the most popular inflation rate calculation methodology in India. The index used to calculated wholesale inflation is known as Wholesale Price Index (WPI). This inflation rate is often known as headline inflation. WPI is released by the Ministry of Commerce and Industry.

Though RBI used WPI for most of its policy decisions before 2014. But WPI based inflation calculation was not false proof.  WPI shows the combined price of a commodity basket comprising 676 items. But WPI does not include services, and it neither reflect the bottlenecks between producer and wholesaler nor between wholesaler and retailer (consumer).

Hence from 2014, as part of the reforms initiated by RBI governor Raghu Ram Rajan, RBI shifted to CPI for policy decisions.

Inflation at Retail Level (Consumer Level)

Consumer often directly buys from retailer. So the inflation experienced at retail shops is the actual reflection of the price rise in the country. It also shows the cost of living better.

Don't miss the latest updates of ClearIAS!

Join ClearIAS Telegram Chanel.

Get free studymaterials and guidance.

Join for FREE

In India, the index which shows the inflation rate at retail level is known as Consumer Price Index (CPI). CPI is based on 260 commodities, but includes certain services too. There were four Consumer Price Indices covering different socio-economic groups in the economy. These four indices were Consumer Price Index for Industrial Workers (CPI-IW); Consumer Price Index for Agricultural Labourers (CPI-AL); Consumer Price Index for Rural Labourers (CPI -RL) and Consumer Price Index for Urban Non-Manual Employees (CPI-UNME). CPI is now using a new series on the base 2010=100 for all-India and States/UTs separately for rural, urban and combined. The Central Statistics Office (CSO), Ministry of Statistics and Program Implementation releases Consumer Price Indices (CPI). CPI is based on retail prices and this index is used to calculate the Dearness Allowance (DA) for government employees.

Headline Inflation vs Core Inflation

Having studied inflation rate measurement at different levels, now let’s focus on two terms related to inflation. They are Headline Inflation and Core Inflation.

Headline Inflation

Headline Inflation is the measure of total inflation within an economy. It includes price rise in food, fuel and all other commodities.

The inflation rate expressed in Wholesale Price Index (WPI) usually denotes the headline inflation. Though Consumer Price Index (CPI) values are often higher, WPI values traditionally make headlines.

Core Inflation (Underline Inflation or Non-food Inflation)

Core inflation is also a term used to denote the extend of inflation in an economy. But Core inflation does not consider the inflation in food and fuel. This is a concept derived from headline inflation. There is no index for direct measurement of core inflation and now it is measured by excluding food and fuel items from Wholesale Price Index (WPI) or Consumer Price Index (CPI).

Causes of Inflation

There can be two set of factors that can cause inflation in an economy. They are Demand Pull and Cost Push.

Demand Pull Factors

  1. Rise in population.
  2. Black money.
  3. Rise in income.
  4. Excessive government expenditure.

Cost Push Factors

  1. Infrastructure bottlenecks which lead rise in production and distribution costs.
  2. Rise in Minimum Support Price (MSP).
  3. Rise in international prices.
  4. Hoarding and black marketing.
  5. Rise in indirect taxes.

What measures can be taken to address inflation?

Both government and central bank (Reserve Bank) try to tackle inflation with their policies which are known as Fiscal and Monetary Policies respectively. Fiscal policies correspond to tax related measures taken by government to control inflation (money supply). RBI through its various monetary policies limit the money supply by altering rates like CRR, Repo, Reverse Repo etc. Administrative measures taken by government like strengthening of Public Distribution System also plays a crucial role in curbing inflation.

Trusted by Toppers. Loved by 3,00,000+ Registered Users.

ClearIAS UPSC Prelims Online Mock Exams.

Take a Free Test

Is inflation always bad for the economy?

Though a high rate of inflation is not good for the economy, a mild inflation, say under 3%, may turn, at times, useful for the economy. As we hinted in the beginning, inflation can occur because of high demand too. High demand on scarce resources will automatically increase prices. This is called demand pull inflation. But demand for a commodity is a good sign from the industry perspective. Industries now will try to produce more commodities to reap the benefit of high prices and demand. More production will trigger GDP growth.

Print Friendly, PDF & Email
Share84
Tweet
WhatsApp
84 Shares

Integrate Learning With Test-Taking!

Is UPSC Prelims your weak area?

Don’t worry!

We can help you score high marks!

Are you ready to practise the right way?

Yes, I want ClearIAS to help me score high!

Get our newsletter

Don't miss our email updates!

About Alex Andrews George

Alex Andrews George is a mentor, author, and entrepreneur. Alex is the founder of ClearIAS and one of the expert Civil Service Exam Trainers in India.

He is the author of many best-seller books like 'Important Judgments that transformed India' and 'Important Acts that transformed India'.

A trusted mentor and pioneer in online training, Alex's guidance, strategies, study-materials, and mock-exams have helped thousands of aspirants to become IAS, IPS, and IFS officers.

Reader Interactions

Comments

  1. rahul says

    September 9, 2014 at 3:39 pm

    great site……..

    Reply
  2. Sahil says

    March 13, 2016 at 12:41 am

    Dear Sir I really liked economics notes mentioned on site,Will it be enough for economics?

    Reply
  3. jai prakash rathore says

    May 17, 2016 at 12:21 pm

    Really liked the way all the things are so well orderly and mannerlly thought here with best example and relating it to indian economy helps to understand batter the economy of india… hearty thanks to u sir…i would like read such important topics here also…

    Reply
  4. SACHIN KUMAR AGRAWAL says

    June 23, 2016 at 2:21 pm

    Excellently Expalined.. Team ClearIAS

    In the section “Inflation at Retail Level (Consumer Level) ” you have mentioned the Base Year as 2010 = 100. Since January 2015 the base year has been changed to 2012 = 100. Also, CFPI i.e. Consumer Food Price Index has been added to CPI – Urban, Rural, Combined. Please verify the facts at your level and change accordingly.

    Thank You For the Post.

    Reply
  5. nikhil kumar says

    February 27, 2017 at 12:32 pm

    Thanks Clearias
    Your notes are really very good and helpful. But sir your notes are not in sequence , It is scattered . If you can serialize the notes then it will be more useful and sir please update the notes along with time. some notes are still showing last update in 2014.
    thanks again for your free initiative.

    Reply
    • ClearIAS.com says

      February 27, 2017 at 12:52 pm

      Thank you for the feedback. We have serialized our most important notes (subject-wise) in the link for easy downloads – https://www.clearias.com/downloads/. We will be updating the notes which need revision soon.

  6. Tejaswini Gowda says

    December 21, 2017 at 7:31 am

    Excellent

    Reply
  7. welayet says

    April 12, 2018 at 12:04 pm

    Really nice…
    thanks..

    Reply
  8. Shaik Siraj says

    May 3, 2018 at 9:02 pm

    was of Great help..thankyou..!

    Reply
  9. Pavana says

    February 24, 2019 at 12:56 pm

    Sir,
    I am studying now 12th std commerce with business maths group. I need to become a IAS officer but what should I wanted to prepare I have no idea about it please guide me sir.

    Reply
  10. Karan says

    March 11, 2019 at 11:13 am

    Very nice notes.
    Dear sir could you please provide comparison of CPI WPI and PPI in a table. If you provide so , we would get benefitted much more.

    Reply
  11. Anjaly says

    July 11, 2019 at 2:26 pm

    Well explained 👏

    Reply
  12. Arvind Singh says

    December 2, 2019 at 9:13 am

    Aspirants friendly explanation.

    Reply
  13. Priya says

    December 15, 2019 at 8:10 pm

    I want economics notes in Tamil i Pdf.If anyone having the link of pdf.Kindly add

    Reply
  14. Ashok Mandal says

    November 8, 2020 at 8:15 pm

    Nicely mentioned on about Inflation …i will follow this site.. thanks to all members of this tram

    Reply
  15. Sooraj D Ningappagol says

    January 10, 2021 at 7:37 pm

    After reading this article
    All my doubts are cleared regards of INFLATION
    Thank You

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Aim to be an IAS Officer?

Nothing can beat practice!

Join ClearIAS Prelims Test Series 2021

Practice 40+ online mock exams!

Limited Period Offer: 40% OFF!

Enroll Now!

ClearIAS Study Materials for UPSC Prelims and Mains

  • Indian History - Indian History and Culture.
  • Geography - Indian and World Geography.
  • Economics - Indian Economy.
  • Indian Polity - Constitution, Social Justice etc.
  • General Science - Science and Technology.
  • Environment - Biodiversity, Climate Change etc.
  • Current Affairs - National and international.

ClearIAS Study Materials for UPSC Mains (Extra-Topics)

  • World History - GS paper 1.
  • Indian Society - GS paper 1.
  • Foreign Relations - GS paper 2.
  • International Affairs - GS paper 2.
  • Internal Security - GS paper 3.
  • Disaster Management - GS paper 3.
  • Ethics - GS paper 4.

ClearIAS Study Materials for UPSC Mains (Paper-wise)

  • Essay Paper
  • GS 1 Paper
  • GS 2 Paper
  • GS 3 Paper
  • GS 4 Paper

ClearIAS Online Mock Exams (Prelims and Mains)

  • Prelims Mock Exams
  • Mains Mock Exams (AWP)

Congrats! You are at the right place - ClearIAS!

  • 1 million+ monthly users!
  • 9,00,000+ ClearIAS App Downloads!
  • 4,50,000+ Facebook Followers!
  • 3,50,000+ Email Subscribers!
  • 3,00,000+ Registered Aspirants!

Prepare for UPSC Online!

Get Started

UPSC Online Preparation Guidance

  • UPSC - Union Public Service Commission
  • IAS - Indian Administrative Service
  • Civil Services Exam (CSE) - Exam Pattern
  • UPSC Syllabus - Subjects to learn
  • IAS Books - Books to learn
  • UPSC CSE Eligibility - Who can appear?
  • UPSC Exam Dates - When should you apply?
  • UPSC Result - Check UPSC Results
  • UPSC FAQs - Clarify your queries

What do toppers' say about ClearIAS?

Poonam Dalal

"Working 24*7 in the police for the last 5 years and been out of touch with the preparation, I took the guidance from your website, especially the ClearIAS prelims test series. I bought it and found it to be the best available online." - Poonam Dalal, ClearIAS Online Student

Read more reviews by UPSC Toppers...

Enroll in

ClearIAS UPSC Prelims Online Test Series 2021

Score High in the IAS Exam!

Trusted by Toppers

Limited Period Offer: 40% Discount!

Enroll now

Don’t lose out without playing the right game!

Adopt the 3 Strategies for Success in the UPSC Civil Services Exam.

Learn UPSC Strategies

  • Home
  • IAS
  • UPSC
  • FAQs
  • Blog
  • Login

UPSC Online Preparation

  • Union Public Service Commission (UPSC)
  • Indian Administrative Service (IAS)
  • Indian Police Service (IPS)
  • IAS Exam Eligibility
  • UPSC Free Study Materials
  • UPSC Exam Guidance
  • UPSC Prelims Test Series
  • UPSC Syllabus
  • UPSC Online
  • UPSC Books
  • UPSC Prelims
  • UPSC Mains
  • UPSC Interview

ClearIAS

  • About ClearIAS
  • ClearIAS Programs
  • IAS Coaching
  • Announcements
  • Book Review
  • ClearIAS App
  • Sitemap
  • Work with us
  • Advertise with us
  • Privacy Policy
  • Disclaimer
  • Terms and Conditions
  • Contact Us

UPSC 2021

UPSC Exam Calendar 2021

Follow us

Follow us on FacebookFollow us on TwitterFollow us on YouTubeFollow us on ClearIAS Learning AppFollow us on ClearIAS Test Prep AppFollow us on Telegram

Featured on

ClearIAS Featured in The Hindu
ClearIAS Featured in the Times of India
ClearIAS Featured in the New Indian Express
ClearIAS Featured in the Yourstory

and many more...

Copyright © 2020 - ClearIAS.com