Inflation and Price Indices in India: JAIIB Paper 1 – Module A Complete Guide

Inflation is a critical economic concept for JAIIB candidates. This guide covers types of inflation, measurement methods, and their impact on Indian banking.

What is Inflation?

Inflation refers to the sustained increase in the general price level of goods and services over time, resulting in a decrease in the purchasing power of money.

Types of Inflation:

1. Demand-Pull Inflation: Caused by excess demand over supply
2. Cost-Push Inflation: Resulting from increased production costs
3. Built-in Inflation: Wage-price spiral effect
4. Creeping Inflation: Gradual rise (less than 3% annually)
5. Walking Inflation: Moderate rise (3-10% annually)
6. Running Inflation: Fast rise (10-20% annually)
7. Hyperinflation: Extremely high inflation (above 50%)

Price Indices in India:

1. Consumer Price Index (CPI):

• CPI-Urban (CPI-U)
• CPI-Rural (CPI-R)
• CPI-Combined
• Base Year: Currently 2012=100
• Compiled by Ministry of Statistics

1. Wholesale Price Index (WPI):

• Measures wholesale price changes
• Base Year: 2011-12=100
• Three major groups: Primary Articles, Fuel & Power, Manufactured Products
• Compiled by Office of Economic Adviser

1. GDP Deflator:

• Ratio of Nominal GDP to Real GDP
• Comprehensive measure covering all goods and services

Inflation Measurement Formula:

Inflation Rate = [(Current CPI – Previous CPI) / Previous CPI] × 100

Impact on Banking:

• Affects interest rate policies
• Influences RBI’s monetary policy decisions
• Impacts loan demand and deposit rates
• Determines real return on investments
• Affects asset quality and NPA levels

RBI’s Inflation Target: 4% (+/- 2%) as per Monetary Policy Framework.

This is a crucial topic for JAIIB Paper 1 Module A examinations.