Inflation: WPI & CPI — Set 5

Correct Answer: B. B. Capital Indexed Bonds or Inflation Indexed National Savings Securities

India has issued Capital Indexed Bonds (CIBs) and Inflation Indexed National Savings Securities (IINSS) which protect investors from inflation by linking returns to the CPI or WPI. The principal and/or interest are adjusted upward with inflation. These instruments help long-term savers preserve purchasing power against eroding inflation.

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

Dearness Allowance (DA) for central government employees and Dearness Relief (DR) for pensioners are revised twice a year (January and July) based on CPI for Industrial Workers (CPI-IW) with base year 2016 = 100. The DA revision is designed to compensate employees for the rise in cost of living due to inflation.

Correct Answer: B. B. Wholesale/producer level

WPI captures price changes at the wholesale (first transaction) level — the price at which goods change hands between producers/importers and traders before reaching retailers and consumers. It is more sensitive to commodity price changes and global input costs. WPI changes eventually pass through to consumer prices with a lag.

Correct Answer: B. B. CPI

CPI better captures services inflation in India because CPI includes services like education, healthcare, transportation, and personal care through the Miscellaneous category. WPI does not cover services at all. Since services constitute a growing share of household expenditure, CPI is a more comprehensive measure of cost-of-living changes.

Correct Answer: B. B. Unequal distribution of benefits from money creation — those who receive new money first benefit most

The Cantillon Effect (named after Richard Cantillon) refers to the observation that newly created money does not affect all prices equally or simultaneously. Those who receive the new money first (banks, government contractors) can buy goods at pre-inflation prices, benefiting at the expense of those who receive money later (ordinary consumers) when prices have already risen.

Correct Answer: B. B. Inflation transmitted through rising prices of imported goods, especially oil

Imported inflation occurs when rising prices of imported goods — particularly oil, raw materials, and food — push up domestic prices. India is highly vulnerable to imported inflation due to its heavy dependence on crude oil imports (~85% of requirement). Global commodity price spikes directly transmit to India's WPI and eventually CPI.

Correct Answer: C. C. 4.9%

India's headline CPI inflation for June 2023 was approximately 4.9%, within the RBI's 2-6% tolerance band. This followed elevated inflation in 2022 (above 6% for several months). The moderation was driven by easing food and fuel prices. RBI's monetary tightening (140 bps repo rate hike in FY 2022-23) also helped contain inflation.

Correct Answer: C. C. Measures prices received by domestic producers for their output (excluding indirect taxes)

The Producer Price Index (PPI) measures prices received by domestic producers for their output, excluding indirect taxes and trade margins. Unlike WPI which includes import prices at the first point of sale, PPI is purely a domestic production price measure. India has been working on developing a PPI to replace WPI, in line with international practice.

Correct Answer: B. B. Average number of times a unit of currency is used in transactions per year

Velocity of money (V) in the Fisher equation MV = PT refers to the average number of times a unit of currency changes hands in economic transactions per year. If V is constant and T (real output) grows at the same rate as M (money supply), prices (P) remain stable. Central banks monitor money supply to control inflation.

Correct Answer: B. B. Inflation allowed to manifest in rising prices without government price controls

Open inflation is inflation that is openly visible in rising market prices, without government price controls suppressing or disguising it. In contrast, suppressed (or repressed) inflation is when the government holds prices down artificially (price controls, rationing) while excess demand exists. When controls are lifted, suppressed inflation becomes open.