Inflation – Types, Causes, and Control Measures
Inflation is a crucial economic concept that features regularly in banking and government exams. Understanding inflation is essential for aspirants of IBPS PO, SBI PO, RBI Grade B, and other competitive exams. Let’s explore it in detail.
📌 What is Inflation?
Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of money. In simple terms, you need more money to buy the same product as time goes on.
Example: If the inflation rate is 6%, something that costs ₹100 today will cost ₹106 next year.
📊 How is Inflation Measured in India?
- Consumer Price Index (CPI): Measures retail inflation, based on the prices of a basket of essential goods and services like food, fuel, clothing, etc.
- Wholesale Price Index (WPI): Measures inflation at the wholesale level.
Currently, the Reserve Bank of India (RBI) primarily uses CPI to monitor and control inflation under the monetary policy framework.
🔍 Types of Inflation
1. Demand-Pull Inflation
Occurs when demand for goods and services exceeds supply. Common during periods of economic growth.
2. Cost-Push Inflation
Happens when the cost of production increases (e.g., wages, fuel, raw materials), leading businesses to raise prices.
3. Built-in Inflation
Also called wage-price inflation. When workers demand higher wages and employers increase prices to maintain profits.
4. Hyperinflation
An extremely rapid and unchecked rise in prices. Rare but dangerous. Example: Zimbabwe (2008) and Germany (1920s).
5. Creeping Inflation
A mild increase in prices (typically under 3%). Considered healthy for economic growth.
6. Galloping Inflation
High inflation rate (10% or more annually), damaging to the economy if not controlled.
📈 Causes of Inflation
- Increased Money Supply: More money in circulation reduces its value.
- Rising Input Costs: Wages, electricity, fuel, and raw materials becoming more expensive.
- Higher Consumer Demand: Especially during festive seasons or after tax cuts.
- Supply Chain Disruptions: Due to natural disasters, war, or pandemic (e.g., COVID-19).
- Imported Inflation: When prices of imported goods increase (e.g., crude oil).
🛠️ How to Control Inflation
1. Monetary Policy Tools (Used by RBI)
- Increase Repo Rate: Makes loans expensive, reducing demand and spending.
- Increase CRR/SLR: Reduces funds available to banks for lending.
- Open Market Operations (OMO): Selling government bonds to absorb liquidity from the market.
2. Fiscal Policy Tools (Used by Government)
- Reduce Government Spending: Lowers overall demand in the economy.
- Increase Taxes: Reduces disposable income and spending.
3. Supply-Side Measures
- Increase production and distribution efficiency.
- Remove bottlenecks in the supply chain.
- Reduce dependence on imports (especially oil and food items).
📌 Inflation Targeting in India
As per the Monetary Policy Framework Agreement, RBI aims to keep inflation at 4% (+/- 2%).
This target is monitored by the Monetary Policy Committee (MPC), which meets every two months to revise policy rates like the repo rate.
📝 Conclusion
Inflation affects everyone — from consumers to investors, businesses, and policymakers. As a banking aspirant, you must understand its types, causes, and how RBI uses tools to manage it. Questions related to inflation are common in the GA section of IBPS, SBI, and RBI exams.
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