Consumer Price Index (CPI)

The Consumer Price Index (CPI) in India is a critical economic indicator used to measure changes in the general price level of goods and services purchased by households. It serves as the primary gauge of inflation at the consumer level and plays a vital role in economic planning, wage adjustments, and policy formulation. Compiled and published monthly by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MOSPI), the CPI reflects the cost of living for different population groups across the country.

Historical Background

The concept of consumer price measurement in India dates back to the pre-independence period, when separate indices were prepared for different occupational groups, such as industrial workers, agricultural labourers, and rural labourers. The earliest consumer price indices were compiled in the 1940s, primarily for industrial workers in select cities, to help determine dearness allowance (DA) and wage compensation.
Over time, with the expansion of the Indian economy and growing diversification of consumption patterns, there arose a need for a comprehensive index representing all categories of consumers. Consequently, in 2011, the Central Statistics Office (CSO) introduced the new series of the CPI with 2012 as the base year, replacing the older and fragmented indices. The index was further revised with 2012=100 as the base for consistency and to capture the changing consumption behaviour of Indian households more accurately.

Structure and Compilation

The CPI measures price changes for a fixed basket of goods and services commonly purchased by households. This basket is classified into major groups such as Food and Beverages, Clothing and Footwear, Housing, Fuel and Light, and Miscellaneous (including healthcare, transport, communication, and education). Each item in the basket carries a specific weight based on its share in total household expenditure, derived from the Consumer Expenditure Survey conducted by the National Sample Survey Office (NSSO).
The CPI is compiled separately for different population segments and regions to ensure representativeness. The four main CPI indices in India are:

• CPI for Rural Areas (CPI-R)
• CPI for Urban Areas (CPI-U)
• CPI Combined (CPI-C) – representing the general population
• Special CPIs – for specific groups such as Industrial Workers (CPI-IW), Agricultural Labourers (CPI-AL), and Rural Labourers (CPI-RL)

Data are collected monthly from around 1,200 villages and over 1,100 urban markets across all states and Union territories. Prices are gathered for both goods and services, and the overall index is computed using the Laspeyres formula, which measures weighted average price changes from the base year.

Base Year and Revision

The base year serves as a benchmark for calculating price movements. The current CPI series uses 2012 as the base year (2012=100). Periodic revisions of the base year are undertaken to reflect updated consumption patterns and ensure the index remains relevant to contemporary lifestyles. The government has been considering a revision of the base year to 2022, based on updated expenditure data and market trends.
Revisions typically incorporate:

• Changes in household consumption patterns
• Inclusion of new goods and services
• Technological advancements affecting consumption
• Updated price collection centres and methods

Uses and Significance

The CPI serves multiple important functions in the Indian economy:

• Measurement of Inflation: It is the official inflation indicator for policy purposes, guiding the Reserve Bank of India (RBI) in setting monetary policy, particularly under the Flexible Inflation Targeting Framework.
• Wage and Pension Adjustments: The index is used to determine Dearness Allowance (DA) for government employees and pensioners, ensuring compensation for inflationary loss in purchasing power.
• Policy Formulation: It aids policymakers in assessing the impact of economic and fiscal policies on consumer welfare.
• Deflation of National Accounts: CPI is used for converting nominal values into real terms for comparison over time.

CPI vs. Wholesale Price Index (WPI)

While both CPI and WPI are measures of inflation, they differ significantly in scope and purpose:

• Coverage: CPI covers retail prices paid by consumers, whereas WPI measures price movements at the wholesale or producer level.
• Basket Composition: CPI includes services, which WPI largely excludes.
• User Relevance: CPI reflects the cost of living, while WPI is more relevant to producer and trade sectors.

Since April 2014, the Reserve Bank of India has adopted CPI (Combined) as the key measure for its monetary policy decisions, replacing WPI as the primary inflation indicator.

Challenges in Measurement

Despite its importance, the CPI faces several methodological and operational challenges:

• Data Collection Difficulties: Ensuring timely and accurate price data from diverse markets across a vast country.
• Changing Consumption Trends: Rapid technological change and evolving consumer habits require frequent updates to the basket.
• Regional Disparities: Price variations across states and rural-urban divides complicate aggregation.
• Service Sector Valuation: Measuring prices of services such as healthcare, education, and transport involves complexities not present in goods pricing.

To address these, the NSO has increasingly incorporated digital data collection, geographical stratification, and computer-assisted price monitoring systems.

Recent Trends and Policy Relevance

In recent years, India’s CPI inflation has fluctuated due to multiple factors such as food price volatility, fuel costs, and supply chain disruptions. The COVID-19 pandemic and subsequent global energy price shocks led to temporary spikes in inflation rates. The Reserve Bank of India’s inflation target under the Monetary Policy Framework Agreement is set at 4% ± 2%, meaning the acceptable range is 2–6%.
Inflation management remains a core priority for the government and central bank, with policy tools such as interest rate adjustments, supply management measures, and fiscal controls being applied to stabilise prices.

Statistical Presentation and Data Release

CPI data are released monthly, usually with a time lag of around 12 days, by the NSO. The publication includes:

• Index numbers for all-India and state-wise
• Rural, urban, and combined indices
• Monthly and yearly inflation rates
• Group-wise and sub-group level price movements

These figures are extensively used by economists, financial analysts, and policymakers to evaluate economic performance and forecast future trends.