Inflation: WPI & CPI — Set 4

Correct Answer: B. B. 1-3% per year

Creeping inflation (also called mild or walking inflation) refers to a low but persistent inflation rate of approximately 1-3% per year. It is generally considered tolerable and even beneficial as it encourages investment and prevents deflation. Central banks in advanced economies typically target around 2% inflation as their definition of price stability.

Correct Answer: C. C. 10-1000% per year

Galloping inflation (also called running inflation) refers to a very high inflation rate of 10-1000% per year. At this level, inflation is seriously damaging to economic stability, contract certainty, and investment. People rush to spend money before prices rise further. Galloping inflation often leads to erosion of savings and economic disruption.

Correct Answer: C. C. 6

India's CPI basket has 6 main groups: (1) Food and Beverages (45.86%), (2) Pan, Tobacco and Intoxicants (2.38%), (3) Clothing and Footwear (6.53%), (4) Housing (10.07%), (5) Fuel and Light (6.84%), and (6) Miscellaneous (28.32%). These weights were determined from the Household Consumer Expenditure Survey 2011-12.

Correct Answer: C. C. 28%

The Miscellaneous category in India's CPI basket has a weight of approximately 28.32%. It includes education, health, transport, communication, personal care, recreation, and other services. The large weight of miscellaneous items reflects growing service sector expenditure in urban households as India develops.

Correct Answer: C. C. Services sector

WPI does not cover the services sector, which is a major limitation. Since services constitute about 55-57% of India's GDP, WPI misses a large part of economic activity. This is why CPI, which includes services through the miscellaneous category, is considered a more comprehensive inflation measure for monetary policy.

Correct Answer: A. A. Deflation

A negative WPI inflation rate means wholesale prices are falling, which is technically deflation at the wholesale level. India experienced WPI deflation for several months during 2015-16, primarily due to falling global commodity and fuel prices. WPI deflation does not always translate into CPI deflation, as retail prices are influenced by local factors.

Correct Answer: B. B. Adopting CPI (Combined) as the nominal anchor for monetary policy

The Urjit Patel Committee Report on 'Revising and Strengthening the Monetary Policy Framework' (January 2014) recommended adopting CPI (Combined) as the nominal anchor for monetary policy, targeting 4% CPI with a ±2% band. It also recommended creating a Monetary Policy Committee (MPC) for collective decision-making. These recommendations shaped India's modern monetary framework.

Correct Answer: B. B. Inflation and unemployment (inverse relationship)

The Phillips Curve (developed by A.W. Phillips in 1958) suggests an inverse (negative) relationship between inflation and unemployment: lower unemployment is associated with higher inflation, and higher unemployment with lower inflation. This relationship was used to guide macroeconomic policy, though it broke down during the stagflation of the 1970s.

Correct Answer: B. B. Monsoon, supply chain issues, and MSP

Food inflation in India is primarily influenced by monsoon performance (affecting crop yields), supply chain disruptions (transportation, storage, cold chain), and government Minimum Support Price (MSP) policies. Structural factors like poor storage infrastructure and fragmented agriculture markets also contribute. RBI can moderate demand-side food inflation but not supply-side shocks.

Correct Answer: B. B. Working Group chaired by Saumitra Chaudhuri

The revision of India's WPI base year from 2004-05 to 2011-12 was done by a Working Group chaired by Saumitra Chaudhuri (member, Planning Commission). The new series was introduced effective April 2017, with 697 commodities and improved methodology. It better captures changes in India's production structure and trade patterns.