Inflation and Phillips Curve

1) What is inflation?

Inflation is a sustained increase in the general price level of goods and services over time, which reduces the purchasing power of money.

Inflation is not:

• a one-time rise in the price of a single commodity,
• a temporary spike in a few prices (unless it becomes broad and persistent).

1.1 Inflation rate

where $P$ is a price index.

2) How inflation is measured (India-relevant)

Common indices:

• CPI (Consumer Price Index): tracks retail prices faced by consumers; used for inflation targeting in India.
• WPI (Wholesale Price Index): tracks wholesale prices; historically prominent in India but CPI is the main monetary policy anchor now.

CUET angle: If asked “Which inflation does RBI target?” → CPI inflation (headline CPI).

3) Types of inflation by speed (standard)

1. Creeping (mild): low, stable inflation
2. Walking/Moderate
3. Running
4. Hyperinflation: extremely high and accelerating inflation

(Exact thresholds differ across books; focus on relative meaning.)

4) Demand-pull vs cost-push vs structural inflation (high-yield)

4.1 Demand-pull inflation

Occurs when aggregate demand rises faster than aggregate supply, especially near full employment.

Drivers:

• expansionary fiscal policy (G↑, T↓),
• expansionary monetary policy (money growth, credit boom),
• consumer/investment booms,
• export booms.

Graph idea: AD shifts right, raising P (and Y in SR).