Consumer Price Index (Urban and Rural)

The Consumer Price Index (CPI) is a key statistical measure that tracks the average change in the prices of goods and services consumed by households over time. It reflects the purchasing power of money and serves as a vital indicator of inflation. In India, separate indices are compiled for urban and rural populations—CPI (Urban) and CPI (Rural)—to capture differences in consumption patterns, expenditure structures, and price movements between rural and urban areas.
These indices are essential tools for economic analysis, policy formulation, and wage and pension adjustments, and together they form the basis of the CPI (Combined), which represents the overall inflation rate for the entire country.

Background and Evolution

Historically, India relied on the Wholesale Price Index (WPI) as the primary measure of inflation. However, as the economy diversified and consumer expenditure patterns evolved, it became necessary to develop a more representative measure of cost-of-living changes.
To address this, the Central Statistics Office (CSO), now part of the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI), introduced the new series of Consumer Price Indices (CPI-Rural, CPI-Urban, and CPI-Combined) in January 2011, with the base year 2012 = 100.
This shift marked a major reform in India’s inflation measurement system, aligning it with international standards and providing a more accurate reflection of household-level inflation across regions and income groups.

Concept and Methodology

The Consumer Price Index measures the average change in the price of a fixed basket of goods and services that households purchase for consumption. The basket represents items typically consumed by households and includes both goods and services.
The index is constructed separately for rural and urban sectors to reflect variations in spending behaviour.

1. CPI (Rural): Represents the price movement for the rural population, capturing consumption related to agriculture, food, fuel, clothing, and other essentials.
2. CPI (Urban): Represents the price changes for the urban population, focusing on housing, transport, education, healthcare, and other non-food services.
3. CPI (Combined): A weighted average of rural and urban indices, representing the national level inflation rate.

Each index uses a Laspeyres’ formula, which takes the base period quantities as weights and calculates the ratio of the current cost of the fixed basket to its cost in the base period.

Data Collection and Compilation

The compilation of CPI is based on extensive field surveys conducted by the National Statistical Office (NSO).

• Price Collection:
  • Prices are collected from around 1,114 villages and 1,181 urban markets across all States and Union Territories.
  • Trained field staff record retail prices of selected items on a monthly basis.
• Household Consumer Expenditure Survey (HCES):
  • The consumption pattern used for determining weights is derived from the Consumer Expenditure Survey conducted by the National Sample Survey Office (NSSO).
  • The base-year weights correspond to the expenditure shares of items in rural and urban households.
• Publication:
  • CPI data are released every month by the National Statistical Office and are used by the Reserve Bank of India (RBI) to set monetary policy.

Structure of the CPI Basket

The CPI basket for both rural and urban areas is designed to reflect the diversity in consumption. It consists of major groups, each containing several sub-groups and items.
Major Groups in CPI (Rural and Urban):

1. Food and Beverages
2. Pan, Tobacco and Intoxicants
3. Clothing and Footwear
4. Housing (Urban only)
5. Fuel and Light
6. Miscellaneous (including education, health, transport, communication, and recreation)

Weight Distribution (Base Year 2012 = 100):

These weight variations highlight the differences in spending priorities: rural households spend more on food and basic necessities, while urban households allocate a larger share to housing and services.

Importance and Applications

1. Measurement of Inflation: CPI (Combined) serves as the official measure of retail inflation in India. The Reserve Bank of India (RBI) uses it as the anchor for its monetary policy, under the framework of inflation targeting introduced in 2016.
2. Policy Formulation: CPI provides critical inputs for fiscal and economic policies, welfare programmes, and indexation of government schemes.
3. Wage and Pension Indexation: Changes in CPI are used to adjust Dearness Allowance (DA) for government employees and pension revisions for retirees.
4. Cost of Living Adjustment: Employers, trade unions, and financial institutions use CPI to determine wage adjustments in line with living costs.
5. Socioeconomic Analysis: The index assists in assessing real income levels, purchasing power parity, and poverty trends across regions.

Recent Developments and Updates

• Base Year Revision: The government periodically revises the CPI base year to account for changing consumption patterns and market dynamics. The next revision, expected to update the base from 2012 to 2022, will use data from the new Household Consumption Expenditure Survey.
• Digital Data Collection: Technological tools and handheld devices are increasingly used for faster and more accurate price recording.
• Introduction of New Indices: Specialised indices such as CPI for Agricultural Labourers (CPI-AL) and CPI for Industrial Workers (CPI-IW) continue to serve specific groups, complementing the all-India CPI framework.

Challenges

Despite its effectiveness, CPI faces certain challenges:

• Outdated Base Year: Delays in revision can reduce relevance as consumption patterns evolve rapidly.
• Coverage Issues: Some emerging services (like digital entertainment or e-commerce) may be underrepresented.
• Price Volatility: Seasonal variation in food and fuel prices can cause temporary distortions in inflation readings.
• Regional Diversity: Large variations in consumption and price levels across states make national aggregation complex.

Comparison with Wholesale Price Index (WPI)

CPI is now considered a more relevant indicator of inflation, as it directly measures the prices faced by households.

Significance in Economic Policy

The Consumer Price Index (Urban and Rural) plays a pivotal role in shaping India’s economic management:

• It guides monetary policy decisions by influencing interest rates and liquidity management.
• It affects fiscal policy through adjustments in subsidies, social benefits, and taxation.
• It provides valuable insights into urban-rural disparities in living costs and consumption patterns.