Inflation: types and causes
How prices are measured, why they rise, and why the aim is a low, steady rate rather than none
CPI figures up to August 2026, released by MoSPI on 14 September 2026
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room what inflation is running at, and then what they feel it is running at. The two answers usually differ. Keep that gap in mind; the deck returns to it. The September 2026 CPI figure is due from MoSPI on 12 October 2026: update the chart slide once it is out.
Inflation is a rise in the general level of prices. One price going up is not inflation.
It is measured as the change over twelve months in the cost of a basket of things households buy. In India the main measure is the Consumer Price Index, or CPI.
Trainer notes
Two ideas to fix early. First, inflation is about the whole basket, not onions or petrol alone. Second, the headline rate compares this month with the same month a year ago, so last year's prices matter as much as this year's.
How CPI is built: the 2024 series
- 358
Items priced
Goods and services in the basket, up from 299 in the old series. The weights come from the Household Consumption Expenditure Survey 2023-24.
- 36.75%
Weight of food
Food and beverages, still the largest part. Old series (2012): 45.86%, but groupings changed, so the two are not like for like. A weight is a share of spending.
- 2024
Base year
The index is set to 100 for 2024. The first figures on this base came out on 12 February 2026. Each month's CPI is released around the 12th of the next month.
Source: MoSPI, First Press Release of Consumer Price Index on Base 2024=100, 12 Feb 2026 (including its technical note and FAQs).
Trainer notes
MoSPI is the Ministry of Statistics and Programme Implementation. Prices come from 1,465 rural markets and 1,395 urban markets in 434 towns, plus 12 online markets. The basket is arranged in 12 divisions. Because food carries the largest weight, a 10% rise in food moves the index far more than a 10% rise in recreation. Each release says the next will come on the 12th of the following month or the next working day.
Two causes: demand-pull and cost-push
Demand-pull
- Spending grows faster than the supply of goods and services.
- Price rises tend to be spread across many items.
- Higher interest rates act on it directly, by slowing borrowing and spending.
Cost-push (supply-side)
- Costs rise or supply falls: a weak monsoon, dearer fuel, a broken supply chain.
- Price rises tend to start in a few items, such as vegetables or fuel.
- Rates cannot grow food or produce oil. Policy mainly limits the knock-on effects.
Take-away: In October 2026 RBI pointed to supply-side pressures and saw limited evidence of demand pressure.
Source for RBI's view: RBI Monetary Policy Statement, 7 Oct 2026, paragraphs 9, 12 and 13.
Trainer notes
Typical sources of demand-pull are rising incomes, easy credit and higher public spending. Real episodes are usually a mix. RBI's October 2026 statement named a deficient monsoon, El Niño conditions and high energy and commodity prices on the supply side, and said risks from strong growth in money and credit exist. 'Knock-on effects' are what RBI calls second-round effects: see the wage-price slide. Governments can act on supply directly, for example through food stocks or import duties.
Imported inflation: two ways in
THE SET-UP
India buys a barrel of crude oil priced at $80. One dollar costs ₹90.
Cost in rupees: 80 × 90 = ₹7,200.
All figures are assumed.
- The oil price rises to $100 and the rupee is unchanged: 100 × 90 = ₹9,000. The cost in rupees is up 25%.
- The oil price stays at $80 but one dollar now costs ₹99: 80 × 99 = ₹7,920. The cost is up 10%.
- Both happen together: 100 × 99 = ₹9,900. The cost is up 37.5%, more than 25% + 10%.
- Dearer fuel then raises the cost of transport and of making other goods, so the effect spreads beyond fuel.
Result: Imported inflation arrives through the world price, the exchange rate, or both at once.
Illustration with assumed, round figures. Not actual oil prices or exchange rates, and not a forecast.
Trainer notes
The same arithmetic applies to anything India buys abroad: edible oil, fertiliser, electronics. For context, RBI's Governor reported that the Indian basket of crude averaged US$ 82.0 a barrel in July 2026, citing the Petroleum Planning and Analysis Cell. How much reaches the consumer also depends on taxes and on how fuel is priced at the pump.
The wage-price spiral
A one-time price shock can turn into lasting inflation if wages and prices start to chase each other.
Prices rise
A shock, say dearer food or fuel, lifts the cost of living.
People expect more
RBI's September 2026 survey (19 cities): median expected inflation a year ahead, 10.0%.
Wages follow
Workers ask for higher pay to keep up. Firms that agree face higher costs.
Prices rise again
Firms raise prices to cover the wage bill, and the loop starts over.
Take-away: In October 2026 RBI saw only limited signs of supply pressures becoming embedded in pricing behaviour.
Sources: RBI, Inflation Expectations Survey of Households, September 2026 round (7 Oct 2026); RBI Monetary Policy Statement, 7 Oct 2026, paragraph 12.
Trainer notes
RBI calls this channel second-round effects: inflation expectations and the pricing behaviour of firms. It is the part of supply-side inflation that interest rates can act on. The household survey covers 19 major cities and its numbers usually run well above measured CPI inflation, so read its direction more than its level. In the same statement RBI did note some evidence of elevated inflation expectations.
Why the aim is 4%, not zero
- <2%
Too low
Contributors to RBI's 2021 currency report found a lower limit below 2% would hamper growth. When prices are expected to fall, people put off buying and debts get harder to repay.
- 5-6%
Too high
The same report put the level above which growth is clearly harmed at 5% to 6%. High inflation also eats into the buying power of savings and fixed incomes.
- 4%
Low and steady
The report found trend inflation of 3.8% to 4.3% and judged 4% the appropriate level. A steady, known rate lets households and firms plan.
Source: RBI press release on the Report on Currency and Finance 2020-21, 'Reviewing the Monetary Policy Framework', 26 Feb 2021. The findings are those of the report's contributors.
Trainer notes
The target of 4% with a band of 2% to 6% is set by the Government; the deck 'RBI and monetary policy' covers the law. The report studied October 2016 to March 2020. The points about delayed purchases, debts and savings are standard economics, not findings of the report. A little inflation also lets prices and wages adjust between sectors without any of them having to fall in rupee terms.
The base effect, with real numbers
JAN TO FEB 2026
CPI inflation compares the index with the same month a year earlier.
Index a year earlier: 101.67 in January 2025, 101.32 in February 2025.
- January 2026: the index is 104.45. Against 101.67 a year earlier, MoSPI's final inflation rate is 2.74%.
- February 2026: the index is 104.57. Prices rose only 0.11% in the month (104.57 ÷ 104.45).
- But the comparison month moved too. A year earlier the index had fallen 0.34%, from 101.67 to 101.32.
- 104.57 ÷ 101.32 = 1.0321, so inflation is 3.21%. It rose 0.47 of a point while prices hardly moved.
Result: The rate can rise or fall because of what prices did a year ago. That is the base effect.
Actual figures: MoSPI CPI (base 2024=100), All India Combined; releases of 12 Feb, 12 Mar and 13 Apr 2026.
Trainer notes
Dividing the rounded January indices gives 2.73%; MoSPI publishes 2.74%; the 0.01 difference is rounding. The base effect works both ways: a jump in prices a year ago makes this year's rate look lower. When a headline number moves, ask how much is this month's price change and how much is the base.
Headline and food inflation in 2026
| Headline CPI | Food (CFPI) | |
|---|---|---|
| Jan | 2.74 | 2.13 |
| Feb | 3.21 | 3.47 |
| Mar | 3.40 | 3.87 |
| Apr | 3.48 | 4.20 |
| May | 3.93 | 4.78 |
| Jun | 4.38 | 5.32 |
| Jul | 4.45 | 5.52 |
| Aug | 4.82 | 5.95 |
Read the chart
- Headline is the whole basket: 4.82% in August 2026, up from 2.74% in January.
- Food prices swing more. Food inflation was 5.95% in August.
- Core leaves out food and fuel to show the underlying trend. RBI put it at 4.2% in August.
- The target is 4%, within a band of 2% to 6%.
Sources: MoSPI CPI press releases (base 2024=100), 12 Feb to 14 Sep 2026; August is provisional. Core inflation: RBI Governor's Statement, 7 Oct 2026.
Trainer notes
CFPI is MoSPI's Consumer Food Price Index. MoSPI does not publish a core figure; RBI defines core as CPI excluding the food and beverages division and fuel. On that measure core was 3.9% for the three months before August. Do not say where inflation is heading. RBI's own projection for 2026-27 is 5.2%, and can be quoted as RBI's.
If you learnt this from older material
What older decks say
- CPI has base year 2012, with food and beverages at 45.86% of the basket.
- The basket has six groups, and house rent is measured in towns only.
- Prices are collected from shops and markets only.
What holds now
- Base year 2024, with food and beverages at 36.75%, since February 2026.
- Twelve divisions. Rural house rent is included for the first time.
- Twelve online markets are added, and airfares and streaming are priced online.
Take-away: Weights and rates on the two bases are not like for like: groupings changed.
Source: MoSPI, First Press Release of Consumer Price Index on Base 2024=100, 12 Feb 2026.
Trainer notes
MoSPI has published linking factors so that the general index can be traced back before 2025, but it says the two series can be linked directly only at the general index level because the classification changed. Material from before 2016 also predates the 4% inflation target; see the deck 'RBI and monetary policy'.
Four things people get wrong
Misconception'Inflation fell, so prices fell.'
What is trueA lower rate means prices are rising more slowly. Prices fall only when the rate is below zero.
Misconception'Higher rates cure any inflation.'
What is trueRates act on demand. With a supply shock, RBI says policy works mainly by limiting second-round effects.
Misconception'My costs rose more than CPI.'
What is trueCPI is an average basket. In RBI's September 2026 survey the median perception in 19 cities was 8.4%; CPI showed 4.82% in August.
Misconception'Zero inflation would be ideal.'
What is trueThe target is 4%. Contributors to an RBI report found a lower limit below 2% would hamper growth.
Trainer notes
On the third point: each household's basket differs from the average, and people notice frequent purchases such as food and fuel more than items whose prices are flat or falling. Do not tell a client the official number is wrong, and do not tell them their experience is wrong either. Both can be true.
Check yourself
Question 1: A barrel of oil costs $80 and a dollar costs ₹90. The oil price rises to $90 and the dollar to ₹92 (assumed figures). By how much does the rupee cost rise?
Answer: Before: 80 × 90 = ₹7,200. After: 90 × 92 = ₹8,280. The rise is ₹1,080, which is 15%.Question 2: The CPI index is unchanged this month, yet the inflation rate goes up. How can that happen?
Answer: The base effect. Inflation compares with the same month a year ago. If the index fell in that month last year, the comparison base is lower, so the year-on-year rate rises even with no change this month.Question 3: Vegetable prices jump after a weak monsoon. Is this demand-pull or cost-push, and what can interest rates do about it?
Answer: Cost-push, or supply-side. Higher rates cannot add to the supply of vegetables. RBI says policy acts mainly by limiting second-round effects, such as higher inflation expectations feeding into wages and other prices.
Sources and disclaimer
Sources for the figures in this explainer
- CPI 2024 series (items, weights, base year, markets, rural rent, online prices): MoSPI, First Press Release of CPI on Base 2024=100, 12 Feb 2026.
- CPI and food inflation, January to August 2026, and index values: MoSPI monthly CPI press releases, 12 Mar to 14 Sep 2026.
- Core inflation, supply-side pressures, second-round effects, 5.2% projection: RBI Monetary Policy Statement and Governor's Statement, 7 Oct 2026.
- Households' inflation perception and expectation: RBI, Inflation Expectations Survey of Households, September 2026 round.
- Growth harmed above 5% to 6%; limit below 2%; trend inflation: RBI Press Release 2020-2021/1159, 26 Feb 2021.
- Indian basket crude price (in notes): RBI Governor's Statement, 7 Oct 2026, citing PPAC.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).