Inflation: WPI & CPI — Set 3

Correct Answer: B. B. Slowing rate of inflation (still positive but declining)

Disinflation refers to a reduction in the rate of inflation — prices are still rising but at a slower pace. For example, if CPI was 8% last year and is 5% this year, that is disinflation. It is distinct from deflation, where prices actually fall (negative inflation). Disinflation typically results from tighter monetary policy.

Correct Answer: B. B. Impact of a high or low price level in the comparison period on current inflation rate

The base effect refers to the impact that the price level of the previous year's comparison period has on the currently measured inflation rate. If prices were very high last year (high base), this year's inflation will appear lower even if prices are still rising. Conversely, a low base year inflates current inflation rates. Base effects distort year-on-year comparisons.

Correct Answer: C. C. Overall CPI (Combined) including all components

Headline inflation refers to the total CPI (Combined) inflation rate, including all components: food, housing, fuel, clothing, and miscellaneous items. It is the most widely cited inflation figure. In contrast, core inflation excludes food and fuel. Headline inflation is used by the RBI as the policy target and is what is commonly reported in news.

Correct Answer: C. C. CPI (Industrial Workers) — CPI-IW

The Labour Bureau publishes CPI for Industrial Workers (CPI-IW) with base year 2016 = 100. It covers workers in factories, mines, plantations, and other industrial establishments. CPI-IW is used for calculating dearness allowance (DA) for government employees and dearness relief for pensioners.

Correct Answer: C. C. Labour Bureau

CPI for Agricultural Labourers (CPI-AL) and CPI for Rural Labourers (CPI-RL) are published by the Labour Bureau under the Ministry of Labour and Employment. CPI-AL is used for revising minimum wages of agricultural workers. These indices differ from the NSO's CPI in methodology and base year.

Correct Answer: C. C. 2014

The RBI formally adopted CPI (Combined) as its headline inflation target in 2014, following the Urjit Patel Committee Report on Monetary Policy Framework (January 2014). This was formalised through the Monetary Policy Framework Agreement between the Government and RBI in February 2015, and enshrined in the RBI Act through the Finance Act 2016.

Correct Answer: B. B. If people expect high inflation, wages and prices rise, causing actual inflation

Inflation expectations are self-fulfilling: if workers expect high inflation and demand higher wages, and businesses expect inflation and raise prices preemptively, actual inflation rises. Anchoring inflation expectations (keeping them low and stable) is therefore a key objective of monetary policy. The RBI's communication strategy aims to anchor expectations at 4%.

Correct Answer: B. B. Primary food articles, manufactured food products

WPI food inflation covers both primary food articles (fruits, vegetables, cereals, pulses, milk, eggs, meat, fish) and manufactured food products (edible oils, sugar, salt, processed food). Food articles in primary articles carry significant weight. WPI food inflation directly impacts farmers' incomes and wholesale market prices.

Correct Answer: B. B. Net food buyers (urban poor and urban households) while benefiting net food sellers (farmers)

Higher food inflation hurts net food buyers (mainly urban and landless poor) by reducing their real purchasing power, while potentially benefiting net food sellers (farmers and agricultural producers). This creates a distributional conflict. Sustained food inflation beyond a point hurts even farmers through higher input cost inflation.

Correct Answer: C. C. 50%

Hyperinflation is generally defined as inflation exceeding 50% per month (Phillip Cagan's definition). At annual rates, this exceeds 13,000% per year. Historical examples include Germany (1923), Zimbabwe (2007-09), and Venezuela (2018-19). Hyperinflation destroys the value of currency, savings, and economic stability.