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Indian Economy

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high importance~2 Q in Tier 16 formulas⚡ 20 shortcuts8 subtopics
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Inflation and price indices

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⏱ 4 min read🧩 5 question types🎯 14 practice Q
The idea in one minute

Inflation is a sustained rise in the general price level. It comes from higher demand or higher costs. CPI measures retail prices and the RBI targets it. WPI measures wholesale goods and is compiled by the Office of Economic Adviser.

01

Types of inflation

Inflation means prices keep rising. The same ₹100 buys less over time.

TypeCause or meaning
Demand-pullToo much demand chasing goods (cheap credit, tax cuts)
Cost-pushCostlier inputs such as oil, fertiliser, wages
StagflationHigh inflation with stagnant growth
DisinflationInflation still positive but slowing
DeflationPrices falling
HyperinflationRunaway triple-digit monthly rise

Tip: Ask one question. Did demand rise, or did costs rise?

02

Headline and core

Headline inflation covers all items. Core inflation is headline minus food and fuel. Core shows the steadier, underlying trend.

Food has the largest weight in the CPI basket. A monsoon shock moves headline sharply while core stays steadier.

03

The main price indices

IndexAgencyBase
CPI (Combined)NSO, MoSPI2024 (new series Feb 2026); old 2012
WPIOffice of Economic Adviser, DPIIT2022-23 (Jun 2026); old 2011-12
CPI-IWLabour BureauUsed for dearness allowance
CPI-AL, CPI-RLLabour BureauFarm and rural labourers
IIPNSO2022-23 from 1 Jun 2026; old 2011-12

IIP measures industrial output, not prices.

04

CPI versus WPI

  • CPI measures retail prices. It includes services.
  • WPI measures wholesale or producer prices. It covers goods only. It has no services.

The 2026 WPI revision raised the basket from 697 to 957 items. It also introduced Producer Price Indices (PPI).

Watch: The RBI targets CPI, not WPI. The target is 4% with a 2% band.

05

Inflation targeting

The RBI Act was amended in 2016. The MPC now aims at CPI inflation of 4% plus or minus 2%. The RBI has failed if inflation stays outside the band for three consecutive quarters.

06

Small facts

  • CPI-IW drives dearness allowance for central employees.
  • The food part of CPI is called CFPI.
  • WPI fuel and power and manufactured products are the volatile groups.
  • The Eight Core Industries index feeds the IIP. The eight are coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity.
  • The GDP deflator is nominal GDP divided by real GDP, times 100.
07

Question types you will see

Each type: how to recognise it, the method step by step, and one question to try.

Type 1very common3 practice Q

Identify the inflation type

How to spot it:

A story about an oil shock, monsoon failure or credit boom. The type is asked.

Method

  1. Ask: did demand rise or did costs rise?

  2. Higher demand (cheap loans, tax cuts) is demand-pull.

  3. Costlier inputs (crude, wages) is cost-push.

  4. Falling prices is deflation. Slower inflation is disinflation.

Why it works:

The cause in the story gives the label.

Try this

A sharp rise in imported crude oil prices pushes up general prices. What is this?

Show solution

  1. Crude oil is an input.

  2. Input cost rose.

  3. Demand did not need to rise.

Answer

Cost-push inflation

Type 2very common3 practice Q

Index, agency and coverage

How to spot it:

'The WPI is compiled by', 'which index does the RBI target', or 'which index covers services'.

Method

  1. CPI (Combined) comes from NSO, MoSPI.

  2. WPI comes from the Office of Economic Adviser, DPIIT.

  3. CPI-IW, CPI-AL and CPI-RL come from the Labour Bureau.

  4. WPI is goods only. CPI includes services.

Why it works:

Each index has one agency and one coverage.

Try this

The Wholesale Price Index in India is released by which office?

Show solution

  1. WPI is a commerce-ministry series.

  2. It sits in DPIIT.

  3. The Office of Economic Adviser releases it.

Answer

Office of Economic Adviser, DPIIT (not the NSO)

Type 3common2 practice Q

Base years and new series

How to spot it:

'The new CPI series uses which base year', 'the WPI basket was expanded to', or 'the IIP base'.

Method

  1. New CPI base is 2024 (February 2026).

  2. New WPI and IIP base is 2022-23.

  3. WPI items went from 697 to 957.

  4. Old bases were 2012 (CPI) and 2011-12 (WPI, IIP).

Why it works:

Match each index to its new year.

Try this

The new Consumer Price Index series released in February 2026 has which base year?

Show solution

  1. CPI uses a calendar year.

  2. It replaced the 2012 base.

  3. The new year is 2024.

Answer

2024

Type 4common2 practice Q

Core versus headline

How to spot it:

'Core inflation excludes', 'headline inflation means', or a statement on food and fuel.

Method

  1. Headline is the full published index.

  2. Core = headline minus food and fuel.

  3. Food has a big CPI weight, so headline jumps with supply shocks.

  4. Disinflation is slower inflation. Deflation is negative.

Why it works:

Core removes the volatile items.

Try this

Core inflation is best described as what?

Show solution

  1. Start with headline inflation.

  2. Remove food and fuel.

  3. What remains is the underlying trend.

Answer

Headline inflation excluding food and fuel

Type 5occasional2 practice Q

CPI variants, IIP and core industries

How to spot it:

'DA is linked to which CPI', 'IIP measures', or 'the eight core industries include'.

Method

  1. CPI-IW from the Labour Bureau drives dearness allowance.

  2. CPI-AL and CPI-RL track farm and rural labourers.

  3. IIP measures output, not prices.

  4. Learn the eight core industries as one list.

Why it works:

These small facts are fixed and easy to match.

Try this

Which index is used to revise the dearness allowance of central employees?

Show solution

  1. Dearness allowance follows industrial workers' prices.

  2. That is CPI-IW.

  3. The Labour Bureau compiles it.

Answer

CPI-IW (Consumer Price Index for Industrial Workers)

08

Shortcuts that save time

⚡ Compiler pairs

CPI, IIP and GDP come from MoSPI (NSO). WPI and PPI come from DPIIT's Office of Economic Adviser.

Example

Who compiles the WPI?

Show solution

  1. WPI covers wholesale goods.

  2. It is a commerce-side index.

  3. The Office of Economic Adviser in DPIIT compiles it.

Answer

Office of Economic Adviser, DPIIT

⚡ Core is headline without the volatile part

Core inflation = headline minus food and fuel. Stagflation = stagnation plus inflation.

Example

Headline CPI is 6%. Food and fuel contribute 2.5%. What is core?

Show solution

  1. Core = headline - food and fuel part.

  2. 6 - 2.5 = 3.5.

Answer

About 3.5%

09

Mistakes to avoid

Where most students lose marks on this subtopic.

Mistake 01

Using WPI for the inflation target.

The MPC targets CPI.

Mistake 02

Giving WPI the old 2011-12 base.

Since 15 June 2026 WPI uses 2022-23 with 957 items.

Mistake 03

Calling disinflation 'deflation'.

Disinflation is a slower rise. Deflation is a fall.

Mistake 04

Saying WPI includes services.

WPI covers goods only. CPI includes services.

Mistake 05

Treating IIP as a price index.

IIP measures industrial output.

10

Quick revision

Read this the night before the exam.

  • Demand-pull is excess demand. Cost-push is costlier inputs.

  • Stagflation is inflation with stagnation. Core = headline - food and fuel.

  • CPI: retail, includes services, NSO (MoSPI), base 2024.

  • WPI: wholesale, goods only, DPIIT, base 2022-23, 957 items.

  • CPI-IW, CPI-AL and CPI-RL come from the Labour Bureau.

  • The RBI targets CPI at 4% with a 2% band.

  • IIP is output, re-based to 2022-23.

11

Practice: 14 questions

Sets of 10, mixed across the question types above. Every answer has a step-by-step explanation.

Topic test · 10 questions

Suggested time 4 min · wrong answers go to your mistake notebook automatically.

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