Inflation (Indian Economy)
Inflation (Indian Economy)
Why In News:
India's retail inflation, measured by the Consumer Price Index (CPI), rose to 4.38% in June 2026 from 3.93% in May, breaching the Reserve Bank of India's (RBI) median target of 4% for the first time under the new CPI series.
What is CPI and How is it Constructed?
CPI measures the change in retail prices of a fixed basket of goods and services consumed by households.
It is released monthly by the National Statistical Office (NSO), under the Ministry of Statistics and Programme Implementation (MoSPI).
Base year revision: The new CPI series uses 2024 as the base year, effective from January 2026, replacing the earlier 2012 base series, to reflect updated consumption patterns from the latest Household Consumption Expenditure Survey.
A base year is a reference year used for comparison, where its value is fixed (usually set as 100) to measure changes in variables like inflation over time.
Sub-indices include CPI-Rural, CPI-Urban and CPI-Combined, along with the Consumer Food Price Index (CFPI), which tracks food articles alone.
RBI's Inflation Targeting Framework
Flexible Inflation Targeting (FIT) was adopted through an amendment to Section 45ZA of the RBI Act, 1934, operationalised via a Government-RBI agreement in 2016.
Target: 4% CPI inflation with a tolerance band of plus or minus 2% (that is, 2% to 6%), reviewed every five years.
The Monetary Policy Committee (MPC) is a six member body, three from the RBI and three government nominees, chaired by the RBI Governor(ex-officio), and must meet at least four times a year to decide the policy repo rate.
Failure clause: If CPI inflation remains outside the tolerance band for three consecutive quarters, the RBI must submit a report to the government explaining the reasons and proposed remedial action.
Key Facts for Prelims
The Wholesale Price Index (WPI) is compiled by the Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade (DPIIT), distinct from CPI, which MoSPI compiles.
Base effect refers to how unusually low or high prices in the corresponding month of the previous year make the current year's inflation figure appear higher or lower than the underlying trend.