Inflation & Deflation

1️⃣ Introduction: What is Inflation?

Inflation is the rise in the general price level of goods and services over time, leading to a decrease in the value of money. When prices rise, each unit of currency buys fewer goods — reducing purchasing power.

Memory Trick: Inflation inflates prices – not income!

A. Meaning and Causes of Inflation

1️⃣ Demand-Pull Inflation

Occurs when aggregate demand > aggregate supply.

Example: Festivals, high government spending, or low interest rates increase demand.

Trick: Demand pulls prices up.

2️⃣ Cost-Push Inflation

Occurs when production costs increase, raising prices.

Example: Rising oil prices, higher wages, costly raw materials.

Trick: Costs push prices up.

3️⃣ Structural Inflation

Caused by supply-side bottlenecks like poor transport, lack of storage, or slow reforms.
Common in developing economies.

4️⃣ Imported Inflation

When prices rise due to imports becoming costlier (e.g., global oil price rise).

5️⃣ Monetary Inflation

Caused by excess money supply in the economy (printing too much currency).

B. Effects of Inflation

Impact Area	Positive Effects	Negative Effects
Producers	Higher profits	Production cost increases
Consumers	None	Decrease in purchasing power
Savers	None	Value of savings erodes
Investors	Short-term gain	Uncertainty increases
Economy	Growth stimulus (mild inflation)	Instability (high inflation)

Trick: Inflation helps producers but hurts pockets.

C. Types of Inflation (Based on Rate)

Type	Rate of Increase	Example / Feature
Creeping Inflation	< 3%	Mild, normal growth indicator
Walking Inflation	3–10%	Noticeable but manageable
Running Inflation	10–20%	Hurts fixed-income groups
Galloping Inflation	> 20%	Rapid price rise
Hyperinflation	> 100%	Complete economic collapse

Trick: Creeping → Walking → Running → Galloping → Hyper.

D. Price Indices – CPI & WPI

1️⃣ Consumer Price Index (CPI)

Measures changes in retail prices paid by consumers. Used to measure inflation for general public.

Category of CPI (India)	Measures Inflation for
CPI (Rural)	Villages
CPI (Urban)	Cities
CPI (Combined)	National average
CPI (IW)	Industrial Workers
CPI (AL & RL)	Agricultural & Rural Labourers

Base Year: 2012 = 100 | Published by: Central Statistics Office (CSO), MoSPI

Trick: CPI = Common People’s Inflation.

2️⃣ Wholesale Price Index (WPI)

Measures changes in wholesale prices of goods traded in bulk. Used to track inflation at producer level.

Base Year	2011–12 = 100
Published by	Office of Economic Adviser, Ministry of Commerce
Components	Primary goods, Fuel & Power, Manufactured products

Trick: WPI = Warehouse Price Index.

CPI vs WPI Comparison

Aspect	CPI	WPI
Measured for	Consumers	Producers / Wholesalers
Published by	MoSPI	Ministry of Commerce
Base Year	2012	2011–12
Includes Services?	Yes	No
Used by RBI?	Yes (CPI)	Earlier (WPI)

Trick: CPI = Retail | WPI = Wholesale.

E. Measures to Control Inflation

1️⃣ Monetary Measures (by RBI)

Tool	Action	Effect
Repo Rate ↑	Expensive borrowing	Reduces money supply
CRR ↑	Banks keep more reserves	Less money to lend
SLR ↑	More security holdings	Controls liquidity
Open Market Operations (OMOs)	Selling govt securities	Absorbs excess money

Trick: Tight money → Tight prices.

2️⃣ Fiscal Measures (by Govt.)

Measure	Purpose
Reduce government spending	Lowers demand
Increase taxes	Reduces disposable income
Control deficit financing	Prevents money oversupply

3️⃣ Supply-Side Measures

Import essential commodities
Improve logistics & storage
Boost agricultural output
Reduce middlemen and hoarding

F. Deflation – The Opposite of Inflation

Definition

Deflation is the persistent fall in general prices due to low demand and reduced money circulation.

Trick: Deflation deflates growth.

Causes of Deflation

Fall in consumer spending
Tight monetary policy
Decline in investment
Overproduction

Effects of Deflation

Reduced profits and wages
Unemployment rise
Economic slowdown

Difference Between Inflation and Deflation

Aspect	Inflation	Deflation
Price Level	Increases	Decreases
Value of Money	Falls	Rises
Demand	High	Low
Economic Effect	Growth + instability	Slowdown
Control Measure	Reduce money supply	Increase money supply

Trick: Inflation burns; Deflation freezes.

G. PYQs (Delhi Police, SSC & State Exams)

1

Inflation refers to —

A) Rise in prices of a few goods B) General rise in price levels C) Fall in prices of all goods D) Decrease in wages

PYQ No.1

Show Answer

B) General rise in price levels

2

Which type of inflation occurs due to increased demand?

A) Cost-Push B) Demand-Pull C) Structural D) Imported

PYQ No.2

Show Answer

B) Demand-Pull

3

Which index is currently used by RBI to measure inflation?

A) WPI B) CPI C) GDP Deflator D) IIP

PYQ No.3

Show Answer

B) CPI

4

The base year for WPI in India is —

A) 2004–05 B) 2010–11 C) 2011–12 D) 2014–15

PYQ No.4

Show Answer

C) 2011–12

5

The base year for CPI in India is —

A) 2010 B) 2011 C) 2012 D) 2014

PYQ No.5

Show Answer

C) 2012

6

Which of the following is NOT a monetary tool to control inflation?

A) Repo Rate B) SLR C) Subsidy D) CRR

PYQ No.6

Show Answer

C) Subsidy

7

Deflation means —

A) Fall in GDP B) Decrease in price level C) Rise in price level D) Decrease in export

PYQ No.7

Show Answer

B) Decrease in price level

...

8

Cost-push inflation occurs due to —

A) Rise in cost of production B) Rise in demand C) Rise in imports D) Rise in income

PYQ No.8

Show Answer

A) Rise in cost of production

9

The full form of CPI is —

A) Central Price Index B) Consumer Price Index C) Common Price Index D) Current Price Indicator

PYQ No.9

Show Answer

B) Consumer Price Index

10

“Too much money chasing too few goods” refers to —

A) Deflation B) Inflation C) Stagnation D) Recession

PYQ No.10

Show Answer

B) Inflation

H. Quick Concept Recap

Concept	Key Idea
Inflation	Rise in price level
Deflation	Fall in price level
CPI	Retail price index (Consumer)
WPI	Wholesale price index
RBI Control Tools	Repo, CRR, SLR
Causes of Inflation	Demand-pull, Cost-push

Mnemonic: Inflation – Increase, Deflation – Decrease.

Final Concept Recap

Inflation = rise in prices, fall in money value
CPI = retail level (used by RBI)
WPI = wholesale level
Inflation control → reduce money supply
Deflation control → increase demand
Mild inflation = growth, high inflation = crisis.

One-Line Memory: Inflation burns wallets; Deflation freezes jobs.

1️⃣ Introduction: What is Inflation?

Definition (Simple)

A. Meaning and Causes of Inflation

1️⃣ Demand-Pull Inflation

2️⃣ Cost-Push Inflation

3️⃣ Structural Inflation

4️⃣ Imported Inflation

5️⃣ Monetary Inflation

B. Effects of Inflation

C. Types of Inflation (Based on Rate)

D. Price Indices – CPI & WPI

1️⃣ Consumer Price Index (CPI)

2️⃣ Wholesale Price Index (WPI)

CPI vs WPI Comparison

E. Measures to Control Inflation

1️⃣ Monetary Measures (by RBI)

2️⃣ Fiscal Measures (by Govt.)

3️⃣ Supply-Side Measures

F. Deflation – The Opposite of Inflation

Definition

Causes of Deflation

Effects of Deflation

Difference Between Inflation and Deflation

G. PYQs (Delhi Police, SSC & State Exams)

Inflation refers to —

Which type of inflation occurs due to increased demand?

Which index is currently used by RBI to measure inflation?

The base year for WPI in India is —

The base year for CPI in India is —

Which of the following is NOT a monetary tool to control inflation?

Deflation means —

Cost-push inflation occurs due to —

The full form of CPI is —

“Too much money chasing too few goods” refers to —

H. Quick Concept Recap

Final Concept Recap

Master Inflation & Deflation for Delhi Police Exam!