Inflation

Definition
Inflation refers to a sustained, general increase in the general price level of goods and services in an economy over a period of time, leading to a decline in the purchasing power of money.
 
Indicators: In India, inflation is primarily measured using the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
 
Impact:
Beneficiaries: Borrowers, business owners, and debtors (as the real value of money owed decreases).
Sufferers: Creditors, fixed-income earners, and savers.
 
Types and Causes of Inflation
A. Based on Rate of Rise
Creeping Inflation: Slow and mild (single-digit, e.g., 1–3% per year), considered healthy for economic growth.
Walking/Trotting Inflation: Moderate rate (3–10% per year), signals warning for the economy.
Running Inflation: Rapid rate (10–20% per year), disrupts economic stability.
Hyperinflation: Extremely high and accelerating inflation (often over 50% a month or astronomical rates), leading to total collapse of the monetary system (e.g., Zimbabwe, Weimar Germany).
 
B. Based on Causes
Demand-Pull Inflation (“Too much money chasing too few goods”): Caused by an increase in aggregate demand due to a rise in money supply, disposable income, or government spending.
Cost-Push Inflation: Caused by an increase in the cost of wages and raw materials (e.g., sudden spikes in crude oil prices), shifting aggregate supply to the left.
 
Economic Terms Related to Inflation
Term / Concept
Description / Core Feature
Significance
Stagflation
A toxic combination of high inflation coupled with stagnant economic growth and high unemployment.
Frequently asked conceptual question in state civil service exams.
Deflation
A sustained decrease in the general price level of goods and services (negative inflation rate).
Opposite of inflation; increases the real value of debt.
Disinflation
A slowdown in the rate of inflation (prices are still rising, but at a slower pace than before).
Often confused with deflation; a normal part of economic stabilization.
Phillips Curve
An economic graph showing a inverse relationship between unemployment and inflation.
Core macroeconomic theory frequently tested in objective exams.
Headline Inflation
Measures total inflation within an economy, including volatile food and energy prices.
Measured using CPI-Combined in India.
Core Inflation
Headline inflation excluding volatile items like food and energy (fuel).
Reflects true underlying long-term trend of inflation.
 
PYQs
 
1. What is stagflation? [Miscellaneous 2018]
(A) High inflation with high employment
(B) High inflation combined with stagnation and high unemployment
(C) Low inflation with rapid economic growth
(D) Deflation accompanied by economic boom
Answer: (B) High inflation combined with stagnation and high unemployment
 
2. Inflation is measured in India primarily through which of the following indices at the retail level? [Miscellaneous 2015]
(A) Wholesale Price Index (WPI)
(B) Consumer Price Index (CPI)
(C) Index of Industrial Production (IIP)
(D) Gross Domestic Product (GDP) Deflator
Answer: (B) Consumer Price Index (CPI)
 
3. When a decrease in the rate of inflation occurs while prices continue to rise at a slower pace, it is known as: [Miscellaneous 2019]
(A) Deflation
(B) Disinflation
(C) Stagflation
(D) Reflation
Answer: (B) Disinflation
 
4. Demand-pull inflation is primarily caused by: [Miscellaneous 2012]
(A) Increase in production costs and raw material prices
(B) Excess of aggregate demand over aggregate supply
(C) Fall in international trade
(D) Reduction in money supply by the central bank
Answer: (B) Excess of aggregate demand over aggregate supply
 
5. The Phillips Curve illustrates the relationship between which of the following two economic variables? [Miscellaneous 2018]
(A) Inflation and Unemployment
(B) Tax rates and Government revenue
(C) Money supply and Interest rates
(D) Exports and Imports
Answer: (A) Inflation and Unemployment