Inflation refers to rise in prices over a period of time. It leads to a fall in the purchasing power of money.
For instance, if the annual inflation rate is 5%, then a commodity that used to cost ₹100 will cost ₹105 a year down the line.
This means your money is worth less because you need to pay more to buy the same amount of goods.
The Wholesale Price Index (WPI) and the Consumer Price Index (CPI) are two commonly used measures of inflation.
While the CPI measures the prices of goods bought by the consumers, the WPI measures the rise in prices of goods bought in bulk at the wholesale level.
The CPI inflation in June 2024 was 5.08%, up from 4.80% in May 2024. The RBI’s target inflation rate is 4%, with a tolerance band of ±2%.
The RBI’s Monetary Policy Committee (MPC) utilises the repo rate and other tools to keep the inflation rate within the tolerance band.
However, not all inflation is bad. While a high rate of inflation is harmful, a small amount of inflation is considered healthy for the economy.