3.

Inflation
➢ Definition – Inflation is a persistent increase in the price levels of
a basket of commodities
o Price and price levels are two different things – price refers
to the monetary value that is paid/received for a good
sold/bought respectively, it is an individual concept;
whereas price level is an aggregate concept which is the
monetary value of basket/group of goods/services
o It is important because inflation is a measure of change in
the price levels as the household buys a mix of goods and
services and inflation tries to measure the impact on the
household
o It is a macro-economic aggregate as it takes into
consideration a basket of commodities

➢ Classification of inflation
o Based on the rate
▪ Moderate – single digit rate of inflation. When inflation
below 10% per year
• Creeping rate – when inflation rate is below 3%
• Walking rate – when inflation rate is above 3 but
below 10%
▪ Galloping – When the inflation rate is above 10% to
50% per year
▪ Hyper – Very high rate of inflation which is
astronomical (over 50% a month)
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
o Based on the causes
▪ Demand pull inflation
• Under this the overall demand or aggregate
demand for the goods and services rises
compared to the supply leading to higher market
prices
• Factors
o Rising growth and incomes – With higher
incomes, the aggregate demand will
increase
• Increasing government expenditure – The
government when increases the expenditure the
overall money supply in the economy increases,
which causes inflation
• Increasing money supply by expansionary
monetary policy
o With central banker following an
expansionary monetary policy (lower
interest rates and higher money supply),
the overall money supply increases and this
may cause inflation
• Because of the above reasons the demand will go
up and, in this situation, there could be two
outcomes – increase in the production or
increase in the prices. Since in a short run
production cannot be expanded, there will be
increase in the prices.
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ Cost push inflation
• Increase in wages – With higher cost of wages,
the cost of production increases and this
contributes to inflation
• Increase in taxes – With government increasing
the indirect taxes, the market price of the goods
or services will increase
• Increase in prices of raw materials – With higher
cost of raw materials/inputs, the cost of
production increases and this increases the
market price
• Higher interest rates on the loans taken by the
manufacturers – With higher interest rates on
the loans given to the manufacturers, the cost of
production increases and this increases the
market prices
• Supply side shocks – there could be disruption
because of the external/internal factors. For
example, wars, floods etc. and this leads to
higher cost
▪ Structural inflation (is more a feature of a developing
country as the resources availability is limited for
them)
• Food shortage
• Scarcity of resources
o Cartelization - suppliers come together and increase the
price irrationally
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 o Hoarding - the middlemen store part of the goods and
create an artificial scarcity in the market.

➢ Two measures of inflation

o WPI
o CPI

➢ WPI (Wholesale Price Index)

o It measures the level of price changes at a wholesale market
level
o Earlier it was rebased after the recommendations of Pronab
Sen committee
▪ Base year was changed from 1993-94 to 2004-05
▪ Coverage in the basket has been increased from 435
commodities to 676 commodities
▪ Weightages also changed
o In 2017, the government has rebased the WPI and IIP (IIP
will be discussed later in Industries Chapter)
▪ The base year was changed from 2004-05 to 2011-12.
▪ The working committee that was set up by the
government in this regard was headed by Dr Saumitra
Chaudhuri
▪ The revision is done to reflect the changes in the
industrial sector, to align it with the base year of other
macroeconomic indicators like the Gross Domestic
Product (GDP), Consumer Price Index (CPI-BY 2012)

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ The revised series will continue to represent the
Mining, Manufacturing and Electricity sectors

▪ The weightage given to the groups will be (for WPI will

be)
• Primary articles – 22.62%
• Manufacturing – 64.233%
• Fuel and Power – 13.15%
▪ Increase in number of itemsfrom 676 to 697. In all 199
new items have been added and 146 old items have
been dropped
▪ A new WPI Food Index is also published. It will be
compiled by taking aggregates of WPI for food
“products” under “manufactured goods” and “primary
articles”
▪ The practice of using Wholesale Price Index (WPI) to
deflate items for which data is reported in value terms
will continue
o It is published once a month
o Published by Economic Advisor

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ CPI (Consumer Price Index)
o It measures the changes in the price levels at retail level.
This inflation has the impact on the common man
o CPI previously was calculated for various groups based on
their consumption patterns
Industrial Urban Non- Agricultural
Workers manual Laborers
Employees

Base year 2016 1984-85 1986-87

Number of 463 180 60

articles

Services Yes Yes No

included

Published by Ministry of MoSPI Ministry of Labour

Labour

o Recently the CPI has been rebased – the base year has been
shifted to 2012. Rather than having various CPIs, there are
three CPIs now which are-CPI (Urban), CPI (Rural) and CPI
(Combined).

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 Rural Urban Combined
Food and 54.18 36.29 45.86
beverages
Pan, tobacco 3.26 1.36 2.38
and
intoxicants
Clothing and 7.36 5.57 6.53
footwear
Housing Not compiled 21.67 10.07
Fuel and light 7.94 5.58 6.84
Miscellaneous 27.26 29.53 28.32

➢ Impact of inflation
o Reduces purchasing power
o Reduces real rate of returns
o Has an impact on exports
o Impact on investment scenario

➢ How to control inflation

o Credit Control - through contractionary monetary/fiscal
policy
o Reduction in Unnecessary Expenditure
o Increase in Taxes
o Increase in Savings which reduces the demand
o To Increase Production - thereby reducing/moderating the
prices

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Inflation impacts the poor, fixed income class and people in
unorganized sector as their purchasing power keeps on reducing
and these groups do not have the savings to tap into. It has very
less impact on the rich class hence it could be concluded that
inflation leads to income redistribution in the favor of rich

➢ Inflation (manageable terms always works in favor of producers,

as this extra price will act as an incentive for them to produce
more

➢ Inflation Targeting
o Government has given the function of controlling inflation to
Reserve Bank of India.
o MPFA was signed between GoI and RBI.
o It was signed in 2015 and came into force from 2016.
o Govt has amended the RBI Act for this.
o Under this in consultation with RBI, the central govt has
fixed the inflation target.
o As per this, the RBI has to maintain Inflation at 4% (+/- 200
bps).
o If inflation goes above 6% or below 2% for three successive
quarters, then the RBI has to give an explanation to the
government listing out-causes and the framework to bring
inflation under control.
o The Monetary Policy committee (MPC) as per the act has to
meet at least 4 times in a fiscal

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ The MPC will have 6 members – 3 from RBI and 3
appointed by the government under the provisions
(section 45ZB) of RBI Act
▪ It will take decisions based on majority of present and
voting

➢ Philips Curve - Represents the relationship between the inflation

and unemployment
o Rate of unemployment and rate of wage inflation are
inversely related (when there is low unemployment, the
labour class is in a better position to bargain for higher
wages)
o Rate of inflation and wage inflation are directly related
(higher the increase in wage, higher demand for goods
leading to inflation)
o Hence rate of unemployment and inflation are inversely
related, and the representation would be a downward
sloping curve

➢ Some terms
Open Inflation- the prices of goods are allowed to fluctuate freely
(or there is least interference of the government in deciding the
prices of goods)
Suppressed inflation- goods are sold at lower prices compared to
the market prices (ex-food grains sold under NFSA)
Stagflation- the period when there is inflation accompanied by
increasing unemployment and lower productivity

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
Updates
➢ Government constitutes panel to revamp WPI (Wholesale
Price Index) (January 2025)
o Govt has constituted a panel to revamp the WPI as India
has undergone structural changes from 2011-12 (current
base year)
▪ The WPI with base year 2011-12 was launched in
May 2017
▪ 2022-23 is likely to be the new base year
▪ The panel Will be headed by NITI Aayog member
Ramesh Chand
▪ The committee will be submitting the report in next
18 months to Office of Economic Advisor (Ministry
of Commerce)
o For the PPI (Producer Price Index), the committee has
been asked to recommend further improvements in the
compilation and presentation formats that are under
consideration and a roadmap to switch from WPI to PPI
o PPI measures average change in selling prices received by
domestic producers for their output
▪ Till the PPI stabilizes, both WPI and PPI will be
calculated
o Major economies such as China, Germany, Japan, USA use
PPI to measure the average changes in prices received by
domestic producers
o PPI vs WPI
▪ Globally PPI tracks the prices of both goods and
services
▪ PPI calculates average prices received by producers
and excludes the indirect taxes. WPI captures the

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 price changes at the point of bulk transactions and
may include some taxes and transportation costs
▪ PPI removes multiple counting bias inherent in
the WPI
▪ As PPI excludes the additional costs on products-
imposed taxes and transportation costs makes it a
more accurate gauge of price movements
▪ Weight of an item under WPI is based on net traded
value whereas under PPI its weights are retrieved
from supply use tables
▪ PPI includes goods and services. WPI has only goods

➢ MoSPI releases discussion paper on PDS items in CPI

(December 2024)
o MoSPI (Ministry of Statistics and Programme
Implementation) has floated a discussion paper on
treatment of free food grains provided under PDS (Public
Distribution System) in calculation of retail inflation
o The base year for CPI calculation is being revised from
2012 to 2024
o The weights will also be based on the HCES (Household
Consumption Expenditure Survey) 2022-23
o When an item is distributed free of cost, its expenditure is
not available. As per international practices, these are
excluded from the basket
▪ The food grains distributed through the PDS are
very high, they will affect the market prices. Hence
there is a need to include these
▪ Globally the practice is to include the market prices
and exclude non-monetary transactions (as per ILO
guidelines to calculate CPI). Hence in most countries

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 including USA, the free food grains provided are not
considered in CPI calculation
o The paper has proposed different methods to include
cases where prices of social security transfers decrease
from positive to zero
▪ Use a zero price and adjust the weight in the next
update
▪ Redistribute the weight to other items

➢ Kanda express - impact on farmers, consumers and traders

(November 2024)
o On 20th October the central government introduced 1600
tonnes of onion into Delhi market which was brought in
by Kanda Express
▪ This was one of the largest ever wholesale market
intervention by the central government in the onion
market
▪ This was sold at a base rate of ₹ 35 per kg and was
procured from farmers at ₹ 28 per kg (last year it
was at ₹ 17)
o Second such train carrying 840 tons reached Delhi couple
of days ago and this time the procurement was done by
National Cooperative Consumers Federation of India Ltd
(NCCF) and for the second time by NAFED (National
Agricultural Cooperative Marketing Federation of India
Ltd

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Abandoning Inflation targeting could be counterproductive
(The Hindu 21/8/2024)
o According to Inflation Targeting in India: A Further
Assessment authored by Barry Eichengreen and Poonam
Gupta
▪ RBIs inflation targeting has worked well and
abandoning it for a more discretionary regime could
be counterproductive
▪ The target of 4% with a tolerance band of 2
percentage points has remained broadly
appropriate
▪ Weight of food price inflation in the CPI inflation
basket should be reduced
▪ Only for one duration - January 2022 to September
2022 - the inflation has been above 6%

➢ RBI - appointments into Monetary Policy Committee (Indian

Express 2/10/2024)
o According to Section 45ZB of RBI act 1934,
▪ The centre is empowered to constitute a 6 member
MPC
o The three members appointed must be persons of ability,
integrity and standing, having knowledge and experience
in forced of economics or banking or finance or monetary
policy under section 45ZC

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
Inflation Target - Need to shift to core as inflation
target?
o Economic Survey
▪ The countries have established their own inflation
targets based on various factors which will serve their
own economic interest
▪ India has performed better than many developed and
emerging economies in relation to its inflation target
▪ In 2023, India's inflation rate was within its target
range of 2% to 6%. Compared to advanced economies
like the USA, Germany, and France, India had one of
the lowest deviations from its inflation target for the
three-year average inflation from 2021-2023.
• Despite the challenges posed by global demand-
supply imbalances due to ongoing geopolitical
tensions, India’s inflation rate was 1.4% below
the global average in 2023
o Headline inflation - When inflation is calculated using all the
commodities in the basket
o Core inflation - The prices of food and fuel commodities are
unstable / short lived / volatile. Hence this inflation is
calculated for remaining commodities (excluding food and
fuel commodities)
o The central banker currently uses the headline CPI for policy
making.
▪ There have been calls for it to use the core inflation for
policy making
▪ There have also been some calls for the central banker
to use the CPI excluding the food articles

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
o In favour of headline inflation
▪ It includes the prices of food and fuel articles. The
households are directly affected by the prices.
• Higher food inflation may have an impact on core
inflation with higher wages
• Food prices tend to have 60% correlation with
household inflation expectations
▪ Inflation targeting with headline inflation has worked
and the inflation for majority period has remind in the
range (though it has been higher for some time now, it
has been on account of supply side factors)
o In favour of core inflation
▪ The prices of food and fuel are very unstable. With the
internal and external factors, the headline inflation
may remain above 6% limit for a longer duration
(stubborn inflation). With this the central banker will
be forced to change the interest rates
▪ Core inflation is much stable and using such an
indicator for policymaking would provide certainty in
policymaking
▪ The tools with the central banker are not very effective
in controlling supply side factors. Hence it makes more
sense to use the core inflation

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 Inflation - Causes and reforms in recent times
o Inflation can be caused because of the supply and demand side
factors
▪ Typically, in India, the inflation is caused by the supply
side factors. However there have been times where the
demand side factors have contributed to the inflation
▪ During the pandemic the supply side were the main
causes of inflation
▪ The concern has been that for a longer period of time, the
headline inflation has been high and even the core
inflation rate has been higher
o Causes of inflation
▪ Food and Fuel prices
• Food and fuel accounts for 57% weightage in India's
retail inflation calculation.
• Due to various factors, the production and supply of
the food grains has been disrupted. This has caused
rise in prices
• Th issue is much more complicated as it has been
found that in various months the rural inflation has
been higher compared to urban inflation. This
would have a higher impact on the consumption
patterns of the rural households
▪ Pent up demand
• One of the factors that has led to contribution to
rising prices is the pent-up demand
• Pent Up Demand simply means that there is a high
demand or unusual high demand for goods or
services. This rise in demand is because the demand

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 is suppressed for certain time period and then it
rises up
▪ Various external factors
• The disruptions in supply chains on account of
Russia-Ukraine war and events that happened in the
middle east
• These have led to higher prices for crude, raw
materials, fertilizers etc
▪ Environmental factors
• There are situations wherein there has been excess
rainfall which has led to lower production, driving
up the prices
▪ Corporate greed (Greedflation - more applicable in case
of MNCs - Multinational Corporations)
• The companies had to increase the prices on
account of pandemic when the prices of raw
material had gone up due to disruption
• However it has been seen that with the end of
pandemic, the supply chains were back in place and
the supply chain eased. It has been found that the
MNCs have not been reducing the market prices
which is leading higher profits for the companies
(This is referred to as Greedflation)
o Measures taken
▪ Open Market Sale Scheme
• The government through agencies such as Food
Corporation of India (FCI) has conducted the Open
Market Sale Scheme (OMSS). This would increase
the supply of food grains in the market, and this has
helped in controlling inflation
▪ Tariffs

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 • The government has imposed tariffs on exports, in
order to increase its market prices and reduce its
competitiveness. In certain cases, it has even
imposed export bans
• In case of some of the imports, the government has
reduced the customs duties, this has made the
imports cheaper and helped in reducing the impact
on inflation
▪ Minimum Export Prices (MEP)
• Government has imposed a minimum export price
below which the commodities are not allowed to be
exported. Thai has been done to ensure that
cheaper and inferior quality commodities are not
exported
▪ Export ban
• The government has banned exports of various
agricultural commodities in order to ensure there
would be higher domestic supply which will help in
controlling inflation in domestic market
▪ Imposing stock limits
• Government has been using the provisions under
Essential Commodities Act 1955, to impose stock
limits on various commodities. With this the
hoarding is not expected to happen, increase in the
supply would help in controlling the inflation
▪ Subsidized sale
• The government has been involved in purchasing
the commodities and selling them at subsidized
prices to provide relief to the common man from
higher prices
▪ Price Stabilization Fund (PSF)

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 • It was set up in 2014-15 under the Department of
Agriculture, Cooperation & Farmers Welfare
(DAC&FW)
• It initially had a corpus of ₹ 500 Cr to tackle
inflationary trends of some agri-horticultural
commodities - onion, potatoes and pulses to protect
the interests of consumers.
• The government through its agencies would be
procuring these food grains during the excess supply
period and then supply it during the deficit in the
market. This would help the government in
protecting the interests of the consumers. This
would also help in addressing the hoarding activities
by the middlemen.
• Subsequently government covered pulses and in
2023 government has even procured tomato under
PSF
o Issues with reforms
▪ The experts have raised the concern that the export bans
and OMSS are a knee jerk reaction and do not form a part
of long-term policy of the government. This has affected
the amount of revenues that are earned by the farmers.
According to a survey that was conducted by the Indian
Council for Research on International Economic Relations
(ICRIER), imposing stock limits has led to losses of ₹ 40000
Cr
▪ The government when imposes export tariffs, the exports
would be affected, and this would also affect the inflow
of dollars
▪ In a situation where there is lower global supply, when
the government bans the exports, this would hurt global

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 food security and especially the poorer African nations
which are heavily dependent on the imports
▪ With the govt imposing export bans, the Indian image
would be affected and also the member countries would
raise a concern that India is not abiding by its
commitments
▪ The earlier economic survey has stated that the
government’s practice of bring the commodities under
Essential Commodities Act and imposing warehousing
restrictions would have a greater impact on investments
as it creates uncertainty in policy making
o Is there a need to provide more flexibility for the central
banker or is there a need to have a relook at the existing
inflation target
▪ The inflation rate periodically goes beyond the target
because of events which are beyond the control of the
government
▪ The inflation rate has been above 4% for a long period of
time during and after the pandemic
▪ The tools available with the central banker is more
effective in controlling the demand side inflation
▪ Though there has been an argument to provide more
flexibility, the inflation in recent times has been mainly
driven by the food articles. The change in price of these is
not permanent but periodic. Hence there is a need to
address the issue of supply
▪ One more argument which has been put forward is
whether the core inflation is a better indicator than
the headline inflation

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 • The headline inflation would be including the
commodities whose price changes are short lived or
temporary
• With inclusion of these commodities (food and fuel),
the variation in the headline inflation could be
higher and this may force the central banker the
change the interest rates
o Way forward
▪ To address the supply side issues the government may
use the foreign trade policy
▪ RBIs monetary policy report has stated that proactive
supply side measures are important in terms of mitigating
the impact of supply shocks. In the medium term there is
a need to
• Promote crop diversification
• Promote climate resilient crops
• Improve storage conditions
• Facilitate value additions
• Augment agriculture supply chains
▪ Promote food processing sector
• This would ensure that during the excess supply, the
output from the agriculture sector would be
processed and not wasted. This will also ensure that
once the supply becomes lean processed foods can
be supplied to ensure price stability
▪ Promote self sufficiency
• Government has been promoting self-sufficiency in
case of fertilizers, pulses etc.

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)