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Inflation

Definition/Introduction

Inflation is defined as a sustained increase in the general price level of goods and services in an economy over a period of time. It is a critical indicator of economic health and can have significant impacts on purchasing power, saving, and investment.

Constitutional Provisions

While inflation is not directly addressed in the Constitution of India, economic policies related to managing inflation are influenced by various articles and provisions:

**Article 39(a)** - The State shall direct its policy towards securing that the citizens, men and women equally, have the right to an adequate means of livelihood.

**Article 47** - The State shall regard the raising of the level of nutrition and the standard of living of its people as among its primary duties.

Historical Evolution

The concept of inflation and its management has evolved considerably in India post-independence. Initially, the economy faced inflationary pressures due to the impact of the Second World War and the partition in 1947. The 1970s witnessed significant inflation rates, especially during the oil crisis. The liberalization of the economy in the 1990s brought about new challenges and strategies to manage inflation.

Classification/Types

Inflation can be classified into different types:

**Demand-Pull Inflation**: Caused by an increase in aggregate demand.

**Cost-Push Inflation**: Resulting from an increase in production costs.

**Built-In Inflation**: Linked to adaptive expectations, where businesses increase prices to maintain profit margins.

**Hyperinflation**: An extreme form of inflation, often exceeding 50% per month.

Important Provisions/Features

Inflation affects purchasing power and savings.

Central banks, like the Reserve Bank of India, manage inflation through monetary policy.

Inflation targeting is a strategy used by the RBI to maintain inflation within a predetermined range.

Landmark Judgments

**Minerva Mills v. Union of India (1980)**: Emphasized the importance of economic justice as a fundamental right, indirectly relating to inflation management.

Amendments

While specific amendments related to inflation are not present, economic policies and reforms since the 1991 liberalization have been crucial in addressing inflationary issues.

Comparison Tables

| Feature | Demand-Pull Inflation | Cost-Push Inflation |

|--------------------|-----------------------|---------------------|

| Cause | Increase in demand | Increase in costs |

| Example | Economic growth | Oil price rise |

UPSC Exam Focus

Understanding the causes and effects of different types of inflation is a common focus for UPSC exams.

Questions often include comparisons between CPI and WPI, and the implications of inflation on economic policies.

Analyzing recent trends in inflation, particularly food and fuel inflation, is frequently tested.

Recent Developments

### Agricultural Subsidies and Reform in 2026 Budget

In the 2026 Union Budget discussions, the rationalization of food and fertilizer subsidies was a major focus. This relates to inflation as agricultural subsidies play a crucial role in ensuring food security and stabilizing food prices, directly impacting inflation rates. The UPSC may focus on how subsidy policies affect inflation and food security.

### India's Minerals Diplomacy

India's minerals diplomacy aims to secure critical resources and reduce import reliance. This can affect inflation by stabilizing prices of essential minerals and reducing the cost of production in various industries. Possible exam questions could explore how resource security contributes to inflation control.

Key Concepts

Inflation - A sustained increase in the general price level of goods and services in an economy over a period of time.

Demand-Pull Inflation - Occurs when aggregate demand in an economy exceeds aggregate supply.

Cost-Push Inflation - Results from an increase in the cost of production, leading to a decrease in aggregate supply.

Core Inflation - Measures the long-term trend in the price level by excluding items with volatile prices.

Consumer Price Index (CPI) - A measure that examines the weighted average of prices of a basket of consumer goods and services, used as an indicator of inflation.

Wholesale Price Index (WPI) - Measures the changes in the price of goods sold and traded in bulk by wholesale businesses.

Hyperinflation - Extremely high and typically accelerating inflation, often exceeding 50% per month.

Stagflation - A situation of slow economic growth accompanied by inflation.

Important Facts

•Consumer Price Index (CPI) is widely used to measure inflation in India.The CPI reflects changes in the price level of a basket of consumer goods and services, important for understanding purchasing power.

•Wholesale Price Index (WPI) does not capture changes in the prices of services.WPI is predominantly focused on goods and is used by the RBI for inflation measurement.

•Demand-pull inflation can be caused by fiscal stimulus.UPSC often asks about the role of fiscal policies in influencing inflation rates.

•Hyperinflation is defined as inflation exceeding 50% per month.Knowledge of hyperinflation scenarios is crucial for understanding extreme economic conditions.

•India has experienced persistent food inflation due to various structural constraints.This fact is often referenced in understanding the impacts of inflation on the economy.

•In India, inflation targeting is a monetary policy strategy used by the RBI.This is a significant aspect of macroeconomic management in contemporary India.