Inflation: WPI & CPI — Set 13

Correct Answer: B. B. 2-6% (RBI's target band)

India's tolerable inflation range for sustained growth is considered to be 2-6%, which is precisely the RBI's CPI target band. This range is low enough to prevent distortions and protect purchasing power, yet high enough to accommodate structural adjustments and prevent deflation. Above 6%, inflation begins to harm investment, savings, and growth prospects.

Correct Answer: C. C. Manufactured Products

Manufactured Products is the largest sub-group in India's WPI with a weight of approximately 64.23%. This reflects India's industrial economy structure. Within manufactured products, food products, chemicals, basic metals, and textiles are major contributors. The dominance of manufactured products means industrial cost pressures significantly drive WPI trends.

Correct Answer: C. C. Monetary policy (policy rate adjustments)

The RBI primarily uses monetary policy — specifically repo rate adjustments — as its main tool to control CPI inflation. When CPI exceeds 6%, the RBI typically raises the repo rate to increase borrowing costs, reduce credit growth, moderate aggregate demand, and bring inflation down. Complementary tools include CRR, OMO, and SDF.

Correct Answer: B. B. CPI is more relevant

CPI is more relevant for cost-of-living measurement because it captures prices of goods and services at the retail level as actually paid by consumers. WPI measures prices at the wholesale (producer) level before retail markups and is not representative of what households pay. For workers' wage demands, purchasing power analysis, and monetary policy, CPI is the superior measure.

Correct Answer: B. B. Once high inflation expectations become entrenched, it persists even after the original cause is removed

Hysteresis in inflation means that once high inflation expectations become embedded in wage-setting and pricing behavior, they can persist even after the original inflationary shock has passed. For example, if a supply shock caused inflation that lasted long enough for workers to demand higher wages permanently, the inflation can become self-sustaining. This 'memory' effect makes controlling entrenched inflation very costly.

Correct Answer: B. B. A publicly announced nominal target (like CPI 4%) that guides monetary policy and anchors expectations

A monetary anchor is a publicly announced nominal target (like an exchange rate peg, money supply growth rate, or CPI inflation target) that central banks commit to and that guides monetary policy. India's CPI 4% ±2% target serves as the monetary anchor. A credible anchor helps anchor inflation expectations, reducing the cost of maintaining price stability.

Correct Answer: C. C. Food inflation (particularly cereals, pulses, vegetables)

During drought years, food inflation — particularly for cereals, pulses, oilseeds, and vegetables — spikes sharply in India as crop production falls below normal. Since food has a 45.86% weight in CPI, even a 10-15% rise in food prices can push headline CPI above the 6% upper tolerance band. The RBI's policy response to supply-side food inflation is typically more cautious.

Correct Answer: B. B. 117

WPI for Primary Articles includes approximately 117 commodities out of the total 697 in the WPI basket. These cover food articles (cereals, pulses, vegetables, fruits, milk, eggs, meat, fish), non-food articles (cotton, oilseeds, jute, sugarcane), and minerals (coal, iron ore, manganese). While fewer in number, primary articles have significant weight (~22.6%) due to their economic importance.

Correct Answer: B. B. How long it takes for inflation to return to target after a shock — related to economic inertia

Inflation persistence measures how long inflation deviates from its target after an initial shock before returning. High persistence means inflation remains elevated long after the triggering event. India's food-dominated CPI can show high persistence when structural supply problems prevent rapid return to normal. Reducing persistence is a key objective of inflation-targeting monetary policy.

Correct Answer: B. B. Business confidence and consumer sentiment influencing spending and therefore inflationary pressure

'Animal spirits' (Keynes' term for business confidence) affects inflation when strong optimism leads to higher investment and consumption spending, increasing aggregate demand and thus demand-pull inflation. Conversely, pessimism reduces spending, easing inflationary pressure. Consumer sentiment indices and business confidence surveys are monitored by the RBI as forward-looking inflation indicators.