Inflation, employment & poverty
UPSC core on inflation measurement (CPI/WPI), the RBI's flexible inflation-targeting mandate, employment surveys (PLFS), and poverty estimation debates.
Inflation and Its Indices
Inflation is the sustained rise in the general price level, eroding the purchasing power of money. India measures it through two principal indices. The Consumer Price Index (CPI), compiled by the National Statistical Office (NSO) under MoSPI with base year 2012, captures retail prices across a basket where food and beverages carry roughly 45.86% weight, making Indian headline inflation acutely food-sensitive. The Wholesale Price Index (WPI), compiled by the Office of the Economic Adviser, Ministry of Commerce, with base year 2011-12, excludes services and tracks producer-level prices.
Since the recommendations of the Urjit Patel Committee (2014), the CPI (Combined) is the nominal anchor for monetary policy, replacing the earlier reliance on WPI. Other indices candidates must distinguish: the GDP deflator (the broadest measure, derived as nominal GDP / real GDP), and legacy series like CPI-IW (industrial workers, used for dearness allowance), CPI-AL and CPI-RL.
Types and Causes
Demand-pull inflation arises when aggregate demand outstrips supply; cost-push inflation stems from rising input costs (oil, wages). Core inflation strips out volatile food and fuel to reveal underlying price pressure. Related concepts tested at Prelims include stagflation (high inflation with stagnant growth and unemployment, as in 1970s oil shocks), deflation (falling prices), disinflation (a falling rate of inflation), and skewflation (price rise in a few commodities, a term popularised by the 2011 Economic Survey for food inflation).
The Inflation-Targeting Framework
The Finance Act, 2016 amended the RBI Act, 1934 to give statutory backing to flexible inflation targeting. The Central Government, in consultation with the RBI, fixed the target at 4% CPI inflation with a tolerance band of +/- 2% (i.e., 2-6%), notified on 5 August 2016 and retained for the 2021-2026 period. A Monetary Policy Committee (MPC) of six members — three from the RBI including the Governor (who holds a casting vote) and three appointed by the Centre — sets the policy repo rate by majority.
A crucial accountability provision: if average inflation breaches the band for three consecutive quarters, the RBI must submit a report to the Government explaining the failure, remedial action and the expected time to return to target. This was triggered in 2022 when inflation stayed above 6% through Q1-Q3, prompting the RBI's first such report in November 2022. Candidates should retain the distinction between headline (CPI all-items) and the policy focus on bringing it to the 4% midpoint over the medium term.
