Which price index is being used to measure inflation by the Reserve Bank of India?
- Purchasing Power Parity based Index
- Wholesale Price Index
- Industrial Cost and Price Indices
- GDP Deflator
- Consumer Price Index
The Correct Option is
Approach Solution - 1
The question asks about the price index used by the Reserve Bank of India (RBI) to measure inflation. Let's explore each option to determine the correct answer:
- Purchasing Power Parity based Index: This index compares the currency values of different countries based on purchasing power. It is not used by RBI to measure inflation within the country.
- Wholesale Price Index (WPI): WPI tracks the price changes in the wholesale market and was historically used by the RBI. However, it is less reflective of the consumer expenses.
- Industrial Cost and Price Indices: These indices are used for specific industry pricing but do not measure overall inflation in the economy.
- GDP Deflator: This is a broad measure of inflation that includes all goods and services but is not the primary index used by RBI for policy decisions about inflation.
- Consumer Price Index (CPI): CPI measures changes in the price level of a basket of consumer goods and services purchased by households. It reflects the inflation experienced by consumers which impacts purchasing power directly.
The Reserve Bank of India uses the Consumer Price Index (CPI) as the main measure of inflation. CPI is a more accurate reflection of the cost of living as it captures the price changes of goods and services consumed by households. Thus, it directly affects the purchasing power of income. Since 2014, CPI has replaced WPI as the primary tool for inflation targeting in monetary policy by the RBI, making Consumer Price Index the correct answer.
Therefore, the correct option is:
- Consumer Price Index
Approach Solution -2
The Reserve Bank of India (RBI) measures inflation primarily using the Consumer Price Index (CPI). The CPI is a comprehensive index representing the changes in the price level of a basket of consumer goods and services purchased by households. It provides an aggregate measure of a country's inflation rate. Here's why the CPI is used:
- Representative Basket: CPI reflects the cost of living by considering a wide range of items that a typical household might purchase.
- Consumer Focus: This index focuses on the price changes from the consumer's perspective, which is crucial for understanding the impact of inflation on the common populace.
- Policy Relevance: By tracking CPI, the RBI can implement monetary policies that stabilize the economy by controlling inflation, thus ensuring consumer welfare.
Therefore, among the given options, the correct answer is:
Consumer Price Index
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