Inflation rate

Also called: Rate of inflation · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Class 11, Ch 7 "Index Numbers"

Meaning

The inflation rate is the percentage change in a price index over a period. It shows how fast the general price level is rising. In India it is usually measured year-on-year (y-o-y), which means comparing this month's index with the index for the same month last year:

Inflation rate (%) = (Iₜ − Iₜ₋₁₂) / Iₜ₋₁₂ × 100

Here Iₜ is the index for this month and Iₜ₋₁₂ is the index for the same month a year earlier. MoSPI uses this exact formula for CPI inflation (2026) [2].

Why it matters:

• It shows how fast the purchasing power of money (how much one rupee can buy) is falling.
• It is the number the RBI's inflation target is measured against, so it guides interest-rate decisions.

Explanation

How the rate is calculated

• Price index: one number that shows how the prices of a fixed basket of goods and services have changed compared with a base year.
• Base year: the reference year when the index is set to 100. For India's new CPI, the base is 2024 = 100 [2].
• Worked example (y-o-y):
• CPI in June 2025 = 105. CPI in June 2024 = 100.

• Inflation = (105 − 100)/100 × 100 = 5%.

• Why compare with the same month last year?

• Prices move with the seasons. For example, vegetables are cheap in winter.

• Comparing June with June removes most of this seasonal effect.

• What a rate means for purchasing power:

• A basket costs ₹100 this year and ₹110 next year. That is 10% inflation.

• The same ₹100 now buys only about 91% of the basket (100/110).

• NCERT is outdated here: it gives a weekly WPI formula, (Xₜ − Xₜ₋₁)/Xₜ₋₁ × 100. WPI is now published monthly, not weekly.

Base effect and momentum: why the rate can mislead

• The y-o-y rate depends on two things: prices today and prices a year ago. The index a year ago is called the base.
• High base → low rate:
• Last year saw a price spike.
• The denominator Iₜ₋₁₂ is large.

• So this year's rate looks small, even if prices are still rising.

• Low base → high rate:

• Last year's prices were unusually low, for example because of a vegetable glut.
• The denominator is small.

• So this year's rate looks large.

• RBI's split [4]:

• Momentum = the month-on-month (m-o-m) price change in the current month.
• Base effect = the m-o-m change in the same month a year ago. That change now "drops out" of the 12-month window.

• Change in y-o-y inflation ≈ momentum now − momentum a year ago.

• Worked example (high base):

• Index: June 2024 = 100, July 2024 = 104 (a one-month spike of +4%). June 2025 = 105, July 2025 = 105.5.
• June 2025 inflation = 5%.
• July 2025 inflation = (105.5 − 104)/104 × 100 ≈ 1.44%.
• Momentum in July 2025 = +0.48%. The base effect removes +4%. 0.48 − 4 ≈ −3.5 points.

• Prices still rose, but the headline rate fell sharply. This is a favourable base effect.

• Worked example (low base):

• Suppose July 2024 had fallen to 98 instead.
• July 2025 inflation = (105.5 − 98)/98 × 100 ≈ 7.65%.
• The price today is the same, but the rate is much higher.

What drives the headline rate: weights

• Headline inflation (the overall CPI inflation rate) is a weighted average of the inflation rates of each item. Weights are each item's share in the household budget.
• Food has a large weight, so food prices move the headline rate a lot.

• Food and Beverages weight (Combined): 45.86% in CPI 2012 → 36.75% in CPI 2024 [2].

• Worked example (same food shock, different weights):

• Suppose food inflation = 10% and non-food inflation = 3%.
• With the 2012 weight: 0.4586 × 10 + 0.5414 × 3 ≈ 6.2%.
• With the 2024 weight: 0.3675 × 10 + 0.6325 × 3 ≈ 5.6%.

• The same food shock now moves headline CPI less.

• Why the food weight falls: as incomes rise, households spend a smaller share on food. This is Engel's law.

Reading the size and sign of the rate

• Positive but falling (for example, 6% → 4%) = disinflation. Prices still rise, only more slowly.
• Negative (for example, an index going from 100 to 98 = −2%) = deflation. The price level itself falls.
• By pace:

Type	Rate	Effect
Creeping	Below about 3% a year	Generally harmless
Galloping	Double- or triple-digit rates a year	People lose trust in money and shift savings to gold and land
Hyperinflation	Over 50% a month	The currency collapses. People turn to barter or foreign currency

• How big is 50% a month? 1.5¹² ≈ 130. Prices rise about 130 times in one year, roughly 12,900% a year.

In India

• Who publishes the numbers:
• CPI (Consumer Price Index: the retail prices households pay) is published monthly by MoSPI (Ministry of Statistics and Programme Implementation).

• WPI (Wholesale Price Index: prices in bulk trade) is published monthly by the Office of the Economic Adviser, DPIIT.

• New CPI series (base 2024 = 100):

• Released on 12 February 2026, starting with data for January 2026 [2][3].
• Weights come from the Household Consumption Expenditure Survey (HCES) 2023-24 [2].
• The number of weighted items rose from 299 to 358 [2].
• It follows COICOP 2018 (a UN system for grouping household spending), so India's CPI can be compared with other countries [2].

• It uses the Jevons index (a geometric mean of price changes) at the lowest level and the Young/Modified Laspeyres index (fixed base-period weights) at higher levels [2].

• How prices are collected:

• The Field Operations Division of NSS, MoSPI, collects prices every month from 1,465 rural and 1,395 urban markets in 434 towns [2].

• Prices from 12 online markets are collected weekly [2].

• Keeping the series comparable over time:

• A linking factor joins the old series (2012) to the new one (2024).
• The general-level (Combined) factor is 0.5267 [2].

• This gives a linked back series from January 2013, so y-o-y rates can still be calculated across the change of base [2].

• Legal benchmark: the inflation target:

• Under Section 45ZA of the RBI Act, the Central Government sets the inflation target in terms of CPI, in consultation with the RBI, once every five years [6].
• The first target was notified on 5 August 2016: 4% CPI inflation, with a band of 2%–6% [6].

• The same target was kept up to March 2026. The RBI released a Discussion Paper on Review of the Monetary Policy Framework on 21 August 2025 [7].

• The RBI uses base effects when explaining inflation:

• May 2021: high momentum plus an unfavourable base effect pushed headline inflation up [4].

• September 2024: inflation rose again after two months below target, because of an adverse statistical base effect plus rising food price momentum [5].

• Latest figure: CFPI (Consumer Food Price Index) food inflation was 2.13% in January 2026 (provisional; rural 1.96%, urban 2.44%) [3].

Don't confuse with

• Price index (level): the index is a level compared with the base year (base = 100). The inflation rate is the percentage change in that level. An index of 105 does not by itself mean 5% inflation. It depends on which period you compare with.
• Disinflation: the inflation rate falls, but it is still positive. For example, 6% → 4%. Prices are still rising.
• Deflation: the inflation rate is negative, so the price level itself falls. Only a negative rate is deflation.
• Month-on-month (momentum) vs year-on-year: m-o-m shows the price pressure this month. Y-o-y also carries the base effect from a year ago. Headline CPI inflation is the y-o-y figure.

Prelims Hooks

• Formula (MoSPI, CPI): (Iₜ − Iₜ₋₁₂)/Iₜ₋₁₂ × 100. NCERT's weekly WPI formula is outdated. WPI is now monthly.
• Who publishes what: CPI is published by MoSPI. WPI is published by the Office of the Economic Adviser, DPIIT. Trap: the RBI does not compile the CPI.
• Base effect: a high base lowers this year's y-o-y rate even when prices are rising. A low base raises it.
• RBI's split: momentum = the m-o-m change this month. Base effect = the m-o-m change in the same month last year.
• New CPI: base 2024 = 100, released 12 February 2026, weights from HCES 2023-24, 358 weighted items, COICOP 2018.
• Target: 4% CPI (2–6%), set by the Central Government in consultation with the RBI under Section 45ZA, RBI Act, every five years. First notified on 5 August 2016.

Mains Points

• Reading the headline rate carefully: a sharp fall in y-o-y CPI can come mostly from a favourable base effect while price momentum is still positive. The RBI's momentum and base-effect split, used in 2021 and 2024, helps policy avoid two mistakes:
• cutting the repo rate (the rate at which the RBI lends to banks for a short time) too early, or
• raising it too late.

Getting this right protects the RBI's credibility under the 4% (±2%) target.

• Food-heavy index and the limits of monetary policy: food inflation comes from supply shocks such as a weak monsoon, heatwaves and perishable TOP (tomato, onion, potato) crops. The repo rate cannot fix these. The fall in the food weight from 45.86% to 36.75% (CPI 2024) makes headline CPI a better signal of demand pressure. Supply-side tools are still needed: Operation Greens, storage, cold chains and MIEWS price alerts.
• Accuracy and fairness of the measured rate: food takes a larger share of poor and rural budgets, so a single headline rate can understate their real price burden (skewflation, protein inflation). Hidden price rises such as shrinkflation are also missed unless prices are compared per unit. Base revisions every 3–5 years, online price collection and quantity adjustment improve the index. This matters for wage indexation, DA and the real value of welfare benefits.

Related concepts

• Inflation
• Base effect
• Food inflation
• Creeping inflation
• Galloping inflation
• Hyperinflation
• Disinflation
• Deflation
• Reflation
• Skewflation

Read more

• Measuring inflation: rate, base effect and the vocabulary of price change