- Inflation indices are crucial for monetary policy decisions.
- The Reserve Bank of India (RBI) uses CPI-Combined as its inflation target.
- The target is 4% with a band of +/- 2%.
- If inflation is outside this band for three consecutive quarters, RBI is deemed to have failed.
- This triggers a report to the government explaining reasons and remedial actions.
- Inflation indices guide RBI in setting policy rates like the repo rate.
- They help RBI manage money supply to maintain price stability and support growth.
Diagram: Understanding Inflation Indices
- GDP Deflator: Compares nominal and real GDP
- Consumer Price Index: Measures retail price changes for consumers
- Wholesale Price Index: Tracks wholesale price changes for producers