What Is Inflation?
Inflation erodes the purchasing power of money over time. Learn what causes it, how it is measured, and what it means for your savings and investments in India.
Inflation in Simple Terms
Inflation is the rate at which the general level of prices for goods and services rises over time. When inflation goes up, each rupee you hold buys less than it did before.
Think of it this way: if a cup of chai cost ₹10 five years ago and costs ₹15 today, that is inflation at work.
Why Does Inflation Happen?
Inflation occurs when the money supply grows faster than the economy's output. There are two main drivers:
- Demand-pull inflation: Too much money chasing too few goods. When consumers have more to spend, businesses raise prices.
- Cost-push inflation: When production costs rise — raw materials, fuel, wages — businesses pass those costs on as higher prices.
How Is Inflation Measured in India?
India primarily measures inflation using the Consumer Price Index (CPI), which tracks price changes in a basket of everyday goods and services — food, housing, fuel, clothing, and more.
The Reserve Bank of India (RBI) targets an inflation rate of around 4%, with a tolerance band of 2%–6%.
How Inflation Affects Your Money
If your savings account earns 5% interest but inflation runs at 6%, you are effectively losing purchasing power even while your nominal balance grows. This is why simply keeping money in a bank account is rarely enough — you need your money to grow faster than inflation.
How the RBI Controls Inflation
The Reserve Bank of India uses monetary policy to control inflation, primarily by adjusting the repo rate — the rate at which it lends money to commercial banks. When inflation is high, the RBI raises the repo rate, making borrowing more expensive, which slows spending and cools prices.