Inflation means prices of things we buy every day — like food, petrol, clothes, and rent — go up over time. Because of this, the same amount of money buys you less than before. For example, if a kilo of tomatoes cost ₹40 last year and now costs ₹50, that’s inflation.
Why Does Inflation Happen?
There are 3 main reasons:
- Demand-Pull Inflation: Too many people want something, but there’s not enough of it. So prices go up.
- Cost-Push Inflation: The cost of making things (like raw materials or wages) goes up, so sellers increase prices.
- Built-In Inflation: Workers ask for higher salaries to keep up with rising prices, and companies raise prices to pay them — a cycle.
How to Calculate Inflation?
Inflation is measured using a “price index” — like the Consumer Price Index (CPI). The CPI tracks how much a basket of common goods and services costs over time.
Inflation Rate Formula:
So, prices went up by 5% from 2023 to 2024.
Measures of Inflation in India
| Index | What It Measures | Who Uses It? |
|---|---|---|
| CPI (Consumer Price Index) | Prices paid by consumers for daily goods like food, fuel, housing | Most common for public inflation data |
| WPI (Wholesale Price Index) | Prices at wholesale level (before reaching shops) | Used to track early price trends |
| GDP Deflator | Overall price level in the economy | Economists and policymakers |
Inflation Overview
Inflation means a steady rise in the prices of goods and services over time. When prices increase, the value of money decreases — this means your money buys fewer things than before.
For example, if a litre of petrol costs ₹100 today and ₹110 next year, the price has gone up by ₹10 — that’s 10% inflation.
Inflation is a normal part of economic growth, but too much inflation can make life expensive and reduce the real value of savings.
In India, inflation is mainly tracked using two indicators —
- CPI (Consumer Price Index): Measures retail price changes for consumers.
- WPI (Wholesale Price Index): Measures price changes at the wholesale level.
The Reserve Bank of India (RBI) works to keep inflation around 4% (±2%), which is considered a healthy level for the Indian economy.
Key Points at a Glance
| Factor | Details |
|---|---|
| Definition | Rise in the general price level of goods and services |
| Measured By | CPI (Consumer Price Index) and WPI (Wholesale Price Index) |
| Ideal Inflation Rate (India) | Around 4% (as per RBI target) |
| Main Causes | High demand, increased production cost, money supply |
| Main Impact | Decreases purchasing power and affects cost of living |
| Controlled By | Reserve Bank of India (RBI) and Government policies |
Why Inflation Happens
Inflation can happen for many reasons. Here are the main ones:
| Reason | Explanation |
|---|---|
| High Demand | When demand for goods is more than supply, prices rise. |
| Cost Push | When the cost of raw materials, labour, or transport goes up, companies increase prices. |
| Money Supply | When too much money is in circulation, its value decreases and prices rise. |
| Government Policies | Sometimes, government spending or tax policies can increase inflation. |
| Imported Inflation | When prices of imported goods rise, it affects local prices too. |
Types of Inflation
| Type | Meaning | Example |
|---|---|---|
| Creeping Inflation | Slow and steady rise (1–3% yearly) | Normal economic growth |
| Walking Inflation | Moderate rise (3–10%) | Can hurt savings |
| Running Inflation | Fast increase (10–20%) | Hard for people to manage |
| Hyperinflation | Extremely high (above 50%) | Money loses value quickly |
Tips to Beat Inflation
- Invest in assets like mutual funds, gold, or real estate that grow faster than inflation.
- Avoid keeping too much cash at home.
- Plan long-term goals (like retirement) using an inflation calculator.
In short, inflation is a normal part of the economy — but knowing how it works helps you save and grow your money smarter.
Conclusion
Inflation is a normal part of every economy, but too much inflation can harm people’s savings and the overall economy.
By understanding how it works and how it’s calculated, you can make smarter financial decisions, invest wisely, and protect your money’s value.