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Inflation is a key economic concept that affects every citizen and plays a major role in shaping monetary and fiscal policies. In simple terms, inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It reduces the purchasing power of money and can lead to distortions in income distribution, savings, and investments.
Inflation
Inflation impacts both microeconomic and macroeconomic dynamics. From household budgeting to central bank policymaking, it is closely monitored by governments and international agencies. In India, inflation control is a primary mandate of the Reserve Bank of India (RBI), which uses interest rates, money supply, and liquidity management to control inflation.
Inflation Overview-
Inflation indicates the rate at which the prices of goods and services increase. It is measured through indices like Consumer Price Index (CPI) and Wholesale Price Index (WPI). Moderate inflation is normal in a growing economy, but high or persistent inflation can reduce the real value of money, impact consumption, and hurt savings.
Overview– Inflation | |
| Indicator | Description |
| Definition | Rise in general price levels over time |
| Common Measures | CPI, WPI, GDP Deflator |
| Ideal Inflation Rate | 2%–6% (targeted by RBI in India) |
| Types | Demand-pull, cost-push, structural, etc. |
| Control Tools | Monetary and fiscal policy instruments |
Types of Inflation – Based on Causes and Severity
There are different types of inflation depending on causes (demand/supply) and rate of price rise. Understanding these types is essential for analysing inflation’s nature and appropriate policy responses.There are two major categories of inflation:
- By Causes – such as Demand-pull and Cost-push inflation.
- By Rate – such as Creeping, Walking, Galloping, and Hyperinflation.
Types of Inflation – Based on Causes and Severity | ||
| Type | Basis | Explanation |
| Demand-Pull Inflation | Cause | Caused by excessive demand with limited supply |
| Cost-Push Inflation | Cause | Arises from rising costs (wages, raw materials) pushing prices upward |
| Structural Inflation | Cause | Due to bottlenecks in supply, infrastructure, or policy failures |
| Creeping Inflation | Rate (0–3%) | Mild, predictable, and manageable – not harmful |
| Walking Inflation | Rate (3–7%) | Noticeable price rise – needs caution |
| Galloping Inflation | Rate (10%–20%) | Very high – disrupts savings, contracts, and planning |
| Hyperinflation | Rate (above 50%) | Extreme price rise – economy may collapse (e.g., Zimbabwe, Germany 1920s) |
Causes of Inflation – Demand, Supply & Policy-Driven Factors
Inflation can originate from both excessive demand or disruptions in supply. Sometimes, government policies (like increasing minimum support prices or printing excess currency) can also lead to inflation. Some inflation is natural and driven by economic expansion, while others arise due to policy mismanagement, supply-chain bottlenecks, or international price shocks.
Causes of Inflation – Demand, Supply & Policy-Driven Factors | ||
| Category | Specific Cause | Explanation |
| Demand-side | Increase in money supply | Too much money chasing too few goods |
| Supply-side | Rise in input costs (oil, raw materials) | Production becomes expensive, pushing prices up |
| Fiscal Policies | High fiscal deficit, subsidies | Excess spending without matching revenue |
| Monetary Policies | Low interest rates | Increases liquidity and credit availability |
| External Factors | Global commodity price shocks | Imported inflation via oil, gas, food |
| Structural Issues | Poor infrastructure, logistics | Delays and costs rise, causing inflation |
Effects of Inflation – Economic, Social & Political Impact
Inflation affects everyone—consumers, businesses, investors, and the government. While mild inflation is necessary for economic dynamism, uncontrolled inflation leads to stagflation, inequality, and erosion of savings.
Before presenting the effects in a table, here are key points:
- It reduces purchasing power.
- Affects fixed income earners like pensioners.
- Distorts investment planning.
- Can lead to social unrest if uncontrolled.
Effects of Inflation – Economic, Social & Political Impact | |
| Sector Affected | Impact |
| Consumers | Reduced real income; hurt savings |
| Producers | Increased production costs; pricing uncertainty |
| Investors | Difficulty in real return calculation |
| Government | Higher subsidy bills; fiscal imbalance |
| Poor & Vulnerable | Worst-hit due to food and essential price rise |
| Economy | Loss of competitiveness; decline in exports |
Control Measures – How Inflation is Managed in India
Inflation is managed through monetary, fiscal, and supply-side policies. In India, the RBI targets inflation through monetary tools, while the government uses fiscal control and subsidies to manage inflationary pressures.
Below is a detailed explanation of inflation-control tools:
- Monetary Policy (RBI): Repo rate, CRR, SLR, Open Market Operations (OMOs)
- Fiscal Policy (Govt.): Cutting unnecessary expenditure, rationalising subsidies
- Supply-side Management: Improving logistics, storage, and easing imports
Control Measures – How Inflation is Managed in India | ||
| Policy Tool | Agency | Purpose/Impact |
| Repo Rate | RBI | Raising it makes borrowing costlier → reduces demand |
| CRR/SLR | RBI | Controls money banks can lend → affects liquidity |
| Government Spending | MoF | Reducing deficit helps control demand-side inflation |
| Import-Export Policy | MoCI | Importing food or crude oil can ease price pressure |
| MSP Reforms | MoA | Rationalising support prices controls food inflation |
Inflation Targets in India – Current Trends and Institutions
India follows an inflation-targeting framework through the Monetary Policy Committee (MPC) of the RBI. As per the RBI Act (Amended 2016), the target is 4% CPI inflation, with a band of ±2%
FAQs on Inflation
What is the definition of inflation?
Inflation is a sustained rise in the general price level of goods and services in an economy.
What is the difference between CPI and WPI?
CPI (Consumer Price Index) measures retail inflation, while WPI (Wholesale Price Index) tracks
wholesale level price changes.
What is demand-pull inflation?
It occurs when demand exceeds supply, causing prices to rise due to consumer competition.
How does RBI control inflation?
Through monetary policy tools like repo rate hikes, cash reserve requirements, and open market operations.
What is the ideal inflation rate in India?
The RBI targets 4% inflation, with an upper tolerance limit of 6% and lower of 2%.
Can inflation be good?
Mild inflation (around 2–4%) is considered healthy as it encourages consumption and investment.
