Inflation: WPI & CPI — Set 11
Economy Advanced · मुद्रास्फीति: WPI और CPI · Questions 101–110 of 141
India's WPI Fuel & Power component covers:
Correct Answer: B. B. Coal, mineral oils (petroleum products), electricity, and other fuels
WPI Fuel & Power (weight ~13.2% in WPI) covers coal (including lignite and coke), mineral oils (high-speed diesel, petrol, naphtha, aviation turbine fuel, LPG, kerosene, furnace oil), and electricity. This group is highly sensitive to global crude oil prices and impacts manufacturing costs across virtually all industries.
The concept of 'Real Wages' relates to inflation as:
Correct Answer: B. B. Nominal wages adjusted for inflation — purchasing power of wages
Real wages = Nominal wages divided by CPI (price index). When nominal wages rise at a lower rate than inflation, real wages fall — workers can buy less with their earnings. During high inflation periods, maintaining real wage levels requires nominal wage increases at least matching the inflation rate. Dearness Allowance (DA) revisions for government workers serve this purpose.
Which of the following is the most recent base year for CPI-IW (Industrial Workers)?
Correct Answer: C. C. 2016
CPI for Industrial Workers (CPI-IW) was revised to base year 2016 = 100, released in September 2020. This replaced the earlier series with base year 2001 = 100. CPI-IW covers 88 centres across India and is used for DA revision of central government employees and dearness relief for pensioners.
The 'Quantity Theory of Money' in its simplest form states:
Correct Answer: B. B. Prices are proportional to money supply (if velocity and output are constant)
The Quantity Theory of Money in its simplest form (Fisher's and Cambridge version) states that the price level is proportional to the money supply, assuming velocity (V) and real output (T or Q) are constant: MV = PT implies P ∝ M when V and T are fixed. Monetarists like Milton Friedman argued 'inflation is always and everywhere a monetary phenomenon.'
India's average CPI inflation during the 2009-2014 period was approximately:
Correct Answer: C. C. 9-10%
India experienced persistently high CPI inflation averaging around 9-10% during 2009-2014, driven by food inflation, fiscal stimulus post-2008 crisis, high commodity prices, and supply bottlenecks. This was a major policy challenge and contributed to the decision to formalise CPI targeting. Inflation came down significantly after the adoption of the inflation targeting framework in 2014.
When inflation consistently remains above the target for an extended period, it is called:
Correct Answer: B. B. Entrenched or persistent inflation
When inflation remains above the target level for an extended period, it is described as entrenched or persistent inflation, meaning it has become embedded in wage-setting behavior, price expectations, and cost structures. Entrenched inflation is harder to reduce as it requires larger monetary policy adjustments and imposes higher output costs (higher sacrifice ratio).
CPI data collection in India is done by:
Correct Answer: B. B. NSO field investigators at retail markets
CPI data is collected by NSO field investigators at retail markets (shops, mandis, weekly markets) in 310 urban centres and 1,114 rural villages. Prices of specific items in the CPI basket are collected weekly or monthly. The data is compiled at NSO headquarters to produce the CPI indices. Field data collection ensures ground-level retail price accuracy.
What happens to purchasing power of money during inflation?
Correct Answer: C. C. It decreases
During inflation, the purchasing power of money decreases — each unit of currency buys fewer goods and services as prices rise. A 5% inflation means ₹100 will buy only what ₹95.24 could buy the previous year. This erosion of purchasing power disproportionately affects those with fixed incomes (pensioners, salaried workers without DA protection).
The 'Wholesale Price Index' is also a useful indicator for:
Correct Answer: B. B. Pipeline inflation — future CPI trends — and input cost pressures for industry
WPI is a leading indicator of pipeline inflation — it captures cost pressures at the wholesale level that will eventually feed into consumer prices with a 1-3 month lag. Rising WPI signals future CPI increases. WPI also captures input cost pressures facing manufacturers, affecting their profit margins. Policymakers use WPI as a forward-looking inflation signal.
The Monetary Policy Committee's inflation target of 4% was last reviewed in:
Correct Answer: C. C. 2021
The Government of India, under Section 45ZA of the RBI Act, reviews the inflation target every five years. The original 4% ±2% target set in 2016 was reviewed and retained unchanged for another five-year period in 2021 (March 2021 notification). The next review is due in 2026. Retaining the target signals continuity in India's monetary policy framework.