Why in News?
India’s retail inflation, measured by the Consumer Price Index (CPI), dropped to a historic low of 0.25% in October 2025. This is the lowest inflation rate recorded since the current CPI series began in January 2012. The data was released by the Ministry of Statistics and Programme Implementation (MoSPI).
Inflation and Deflation:
Inflation signifies a sustained increase in the general price level of goods and services within an economy, leading to a progressive erosion of purchasing power.
Deflation is the opposite phenomenon, characterized by a persistent decrease in general price levels, which subsequently increases purchasing power.
Classification by Rate:
Inflation is often categorized by the speed at which prices escalate:
- Creeping Inflation (Low): A mild and gradual price rise, typically under 3% annually. It is often considered manageable or even beneficial for stimulating economic activity.
- Walking Inflation (Trotting): A moderate acceleration in prices, generally between 3% and 10% per year. It signals potential economic overheating and warrants policy attention.
- Galloping Inflation (Running): A rapid price surge at double-digit or triple-digit rates (e.g., 10% to 50% annually), which destabilizes the economy and erodes savings.
- Hyperinflation: An extreme and uncontrollable scenario where prices rise by more than 50% per month, leading to a complete collapse of the currency’s value (e.g., Weimar Germany, Zimbabwe).
Classification by Causal Factor :
- Demand-Pull Inflation: This occurs when aggregate demand for goods and services exceeds the economy’s production capacity. It is often described as “too much money chasing too few goods,” frequently driven by increased money supply or expansionary fiscal policies.
- Cost-Push Inflation: This arises from an increase in the costs of production inputs, such as raw materials, energy, or labor (wages). Producers pass these higher costs onto consumers in the form of higher prices.
- Built-in Inflation: This type is driven by expectations. When people expect prices to continue rising, they demand higher wages. This creates a “wage-price spiral,” where higher wages lead to higher prices, reinforcing the expectation of future inflation.
- Structural Inflation: This is caused by fundamental inefficiencies or “bottlenecks” in an economy, such as rigid supply chains, inadequate infrastructure, or monopolistic market structures.
Primary Measures of Inflation :
In India, inflation is tracked using several key statistical indices:
1. Consumer Price Index (CPI):
- Measures price changes at the retail level for a fixed basket of goods and services consumed by households.
- Published by the Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation (MoSPI).
- It is the primary index used by the RBI for its monetary policy targets.
2. Wholesale Price Index (WPI):
- Measures price changes at the wholesale or producer level.
- It tracks a basket composed only of goods (it excludes services).
- Published by the Office of Economic Adviser, Department for Promotion of Industry and Internal Trade.
3.GDP Deflator:
- This is the broadest measure of inflation, as it captures the price changes of all domestically produced goods and services in an economy.
- It is calculated as the ratio of Nominal GDP to Real GDP and does not use a fixed basket of goods.
Key Economic Impacts :-
- Erodes the purchasing power of currency.
- Triggers higher interest rates from central banks.
- Worsens income inequality, disproportionately affecting the poor.
- Reduces the real, inflation-adjusted returns on savings and investments.
- Diminishes export competitiveness due to higher domestic prices.
- Creates business uncertainty and increases operational costs.
Control Measures
- Monetary Policy (RBI): Hikes policy rates (Repo), sells securities (Open Market Operations), and raises loan margin requirements to reduce money supply and credit demand.
- Fiscal Policy (Government): Reduces aggregate demand by cutting public expenditure and increasing taxes.
- Supply-Side Policy: Addresses supply bottlenecks through structural reforms or uses administrative actions like releasing buffer stocks and adjusting trade duties.
