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Inflation Explained: Types, Measurement (WPI vs CPI) & Impact

Introduction

Inflation is the general rise in price levels, reducing the purchasing power of money. "Too much money chasing too few goods."

1. Types

• Demand Pull: When demand exceeds supply. (Sign of a growing economy up to a limit).
• Cost Push: Rise in input costs (e.g., Oil price shock) forces prices up. (Bad for economy).

2. Measurement Indices

• WPI (Wholesale Price Index): Tracks factory gate prices. Does not include services.
• CPI (Consumer Price Index): Tracks retail prices (what you pay). Better indicator of cost of living. Includes services. RBI uses CPI for inflation targeting.

3. Impact

• Debtors/Borrowers: Gain (repay in cheaper rupees).
• Creditors/Savers: Lose.
• Fixed Income Groups: Lose heavily.

Conclusion

Moderate inflation (around 4%) is necessary for growth; hyperinflation is a disaster. Shrinkflation (same price, less quantity) is a modern stealth inflation.