Inflation: measurement (CPI/WPI), causes & control
How India measures inflation (CPI vs WPI), the structural and monetary causes, and the RBI-Government toolkit for control under the flexible inflation-targeting framework.
What inflation is, and how India measures it
Inflation is a sustained rise in the general price level, eroding the purchasing power of money. India measures it through two principal index families.
Consumer Price Index (CPI): Compiled by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI), the CPI (Combined) has a base year of 2012 and is the headline retail inflation gauge. It is the price of a fixed consumption basket faced by households. Food and beverages carry roughly 45.86% weight, with food & beverages plus fuel forming the volatile component. The current CPI series merged the older CPI-Industrial Workers (CPI-IW, base 2016, compiled by the Labour Bureau), CPI-Agricultural Labourers (CPI-AL) and CPI-Rural Labourers. Since the 2016 amendment to the RBI Act, 1934 (Section 45ZA), CPI (Combined) is the official target variable for monetary policy.
Wholesale Price Index (WPI): Compiled by the Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade (DPIIT), base year 2011-12, the WPI captures prices at the wholesale/producer stage. It has three groups: Primary Articles (~22.6%), Fuel & Power (~13.2%), and Manufactured Products (~64.2%). Crucially, WPI excludes services entirely, whereas CPI includes them. WPI is not the policy target but signals input-cost pressure.
Why the two indices diverge
The CPI and WPI frequently move in opposite directions. WPI is dominated by manufactured goods and global commodity prices (crude, metals); CPI is dominated by food and services. In 2020-21, WPI briefly turned negative on collapsing oil prices while CPI stayed elevated on food. The gap matters because a candidate must explain which inflation the RBI targets and why food shocks (a supply phenomenon) drive headline CPI even when core (CPI excluding food and fuel) is stable.
Allied measures you must know
- GDP deflator: the ratio of nominal to real GDP, the broadest price measure, covering all domestically produced goods and services.
- Core inflation: CPI excluding food and fuel; the RBI watches it for demand-side, persistent pressure.
- Headline inflation: the full CPI basket including volatile food and fuel.
- Housing index in CPI uses house rent; it is absent in WPI.
Key distinctions UPSC tests: deflation (falling general prices), disinflation (a falling rate of inflation), stagflation (high inflation with stagnant growth and high unemployment, as in the 1970s oil shocks), and skewflation (a price rise in some sectors, typically food, while others are stable) — the last term was popularised in the Economic Survey 2010-11.