Inflation

📖 What is inflation?

Inflation is a sustained rise in the general price level of goods and services, which reduces the purchasing power of money over time. It has two broad causes:

• Demand-pull inflation — too much money chasing too few goods; demand outpaces supply.
• Cost-push inflation — rising production costs (e.g. wages, raw materials, fuel) get passed on to consumers.

📏 How inflation is measured

• CPI (Consumer Price Index) — tracks retail prices of a basket of goods and services consumers actually pay; this is the index RBI uses for inflation targeting.
• WPI (Wholesale Price Index) — tracks prices at the wholesale/producer level, before retail markup; doesn't include services.

🎯 RBI's inflation-targeting framework

Since 2016, India formally follows a flexible inflation-targeting regime: the RBI is mandated to keep CPI inflation at 4%, within a tolerance band of 2% to 6%. If inflation stays outside this band for three consecutive quarters, the RBI is required to explain the failure to the government and outline corrective steps.