Inflation: WPI & CPI — Set 9

Correct Answer: C. C. Food and fuel

India's core CPI (CPI excluding food and fuel) removes the food and beverages group and fuel & light group from the headline CPI. This creates a more stable underlying inflation measure. Core CPI is closely watched by the RBI to assess domestic demand-driven inflation pressures, as food and fuel are subject to supply shocks that monetary policy cannot directly address.

Correct Answer: B. B. By conducting OMO (selling government securities to absorb excess liquidity)

Through the liquidity channel, the RBI absorbs excess liquidity from the banking system by selling government securities through Open Market Operations (OMO). Less liquidity means banks have fewer funds to lend, reducing credit growth and money supply, which moderates demand and controls inflation. The LAF corridor (repo and reverse repo/SDF) also manages day-to-day liquidity.

Correct Answer: B. B. WPI rises sharply first; CPI rises with a lag as costs pass through

During a global oil price spike, WPI rises sharply first because WPI directly includes fuel and power prices at wholesale level. CPI rises with a lag as the higher energy and transportation costs gradually pass through to retail consumer prices. The transmission lag means WPI is a leading indicator of future CPI inflation during commodity price shocks.

Correct Answer: B. B. REER but not NEER

REER (Real Effective Exchange Rate) incorporates inflation differentials while NEER (Nominal Effective Exchange Rate) does not adjust for inflation. REER = NEER adjusted for relative price changes between India and its trading partners. If India's inflation is higher than its trade partners, REER appreciates even if NEER is unchanged, indicating India's export competitiveness is falling.

Correct Answer: B. B. Actual price rises are prevented by government price controls while underlying inflationary pressures exist

Suppressed inflation (repressed inflation) occurs when the government uses price controls, rationing, or subsidies to prevent prices from rising despite existing excess demand. While prices appear stable, the underlying inflationary pressure builds up. When controls are eventually lifted, prices surge. India's administered pricing of petrol, diesel, and LPG was an example of suppressed inflation.

Correct Answer: C. C. 2% to 6%

The RBI's inflation tolerance band is 2% to 6%, with a target of 4%. CPI inflation within 2-6% is considered acceptable. If CPI rises above 6% or falls below 2% for three consecutive quarters, the RBI must report to the government. This framework provides flexibility while maintaining accountability for inflation control.

Correct Answer: B. B. All 28 states and 8 UTs

The correct answer is B. All 28 states and 8 UTs. India's CPI (Combined) collects price data from all 28 states and 8 Union Territories, covering both urban markets (310 towns) and rural markets (1,114 villages). The all-India coverage ensures the CPI reflects price trends across the entire country's diverse economic geographies, from metropolises to remote villages. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: C. C. PPI (Producer Price Index)

India does not yet have an official PPI (Producer Price Index) as a regular release. India has been working on developing PPI to eventually replace WPI, as WPI has methodological limitations. India currently uses CPI (Combined/Urban/Rural), CPI-IW (Industrial Workers), CPI-AL (Agricultural Labourers), CPI-RL (Rural Labourers), and WPI as its official price indices.

Correct Answer: B. B. Inflation caused by specific sector supply constraints — transport, power, land — raising costs

The correct answer is B. Inflation caused by specific sector supply constraints — transport, power, land — raising costs. Bottleneck inflation arises when specific sectors face supply constraints — such as inadequate transport infrastructure, power shortages, land acquisition delays — that increase costs for the entire economy. In India, power shortages causing diesel generator usage, and poor road infrastructure increasing transport costs, are examples of bottleneck inflation drivers. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: C. C. Asset price inflation (housing, stocks, gold)

CPI does not directly capture asset price inflation — the rise in prices of financial assets (stocks, bonds) or real assets (housing values, gold prices). CPI includes housing rent (not house prices), so rising property values are not captured. Central banks monitor asset price inflation separately as it affects financial stability and wealth effects on consumption.