Consumer Price Index
The Consumer Price Index (CPI) is one of the most significant measures of inflation, reflecting changes in the average price level of a basket of goods and services consumed by households over time. It serves as a key economic indicator to assess the cost of living, purchasing power, and price stability in an economy. In India, the CPI is used not only for monitoring inflation but also for wage adjustments, pension revisions, and policy formulation by the government and the Reserve Bank of India (RBI).
Background
The concept of the Consumer Price Index originated as a tool to measure changes in the cost of living for specific groups of people. In India, different versions of the CPI were introduced during the pre-Independence period to address the needs of particular sections of society, such as industrial and agricultural workers.
Over the years, India’s price index system has evolved to provide more comprehensive and representative data. Initially, several separate indices existed—such as CPI for Industrial Workers (CPI-IW), CPI for Agricultural Labourers (CPI-AL), and CPI for Rural Labourers (CPI-RL). However, to create a unified national indicator, the Central Statistics Office (CSO) (now part of the National Statistical Office – NSO) introduced a new all-India CPI (Combined) in 2011, with the base year 2012 = 100. This unified index covers both rural and urban populations.
Concept and Definition
The Consumer Price Index measures the weighted average change in the retail prices of a fixed basket of goods and services purchased by households. It captures how much prices, on average, have increased or decreased over time, thereby indicating the rate of inflation as experienced by consumers.
Mathematically, CPI is computed using the Laspeyres formula, which keeps the quantity weights constant for the base year:
CPI=∑(P1×W)∑(P0×W)×100\text{CPI} = \frac{\sum (P_1 \times W)}{\sum (P_0 \times W)} \times 100CPI=∑(P0×W)∑(P1×W)×100
Where:
- P1P_1P1 = Price in the current period
- P0P_0P0 = Price in the base period
- WWW = Weight of the item in the base year consumption basket
Types of Consumer Price Indices in India
India maintains several CPI series catering to different population groups, each reflecting their consumption patterns:
- CPI (Combined): Represents both rural and urban consumers across the country and serves as the official measure of retail inflation used by the RBI for monetary policy.
- CPI for Industrial Workers (CPI-IW): Measures price changes affecting urban wage earners and industrial workers; compiled by the Labour Bureau.
- CPI for Agricultural Labourers (CPI-AL): Reflects the cost of living for rural agricultural workers.
- CPI for Rural Labourers (CPI-RL): Measures retail inflation for non-agricultural rural labourers.
Current Base Year and Coverage
The base year for the combined CPI is 2012 = 100.
- CPI (Rural): Covers 448 villages.
- CPI (Urban): Covers 310 towns.
- CPI (Combined): Represents both urban and rural households with data collected monthly by the NSO under the Ministry of Statistics and Programme Implementation (MoSPI).
Composition of the CPI Basket
The CPI basket reflects the average household expenditure pattern and is divided into major groups, each with assigned weights according to consumption habits:
| Major Group | Weight (Rural) | Weight (Urban) | Combined Weight |
|---|---|---|---|
| Food and Beverages | 54.18% | 36.29% | 45.86% |
| Pan, Tobacco and Intoxicants | 3.26% | 1.36% | 2.38% |
| Clothing and Footwear | 7.36% | 5.57% | 6.53% |
| Housing | – | 21.67% | 10.07% |
| Fuel and Light | 7.94% | 5.58% | 6.84% |
| Miscellaneous (Education, Health, Transport, etc.) | 27.26% | 29.53% | 28.32% |
This structure indicates that food has the highest weight in the rural index, while services like housing and education have greater weight in the urban index.
Calculation and Publication
The CPI is computed based on data collected monthly from selected markets across India. The National Statistical Office (NSO) compiles and releases CPI (Rural, Urban, and Combined) every month, typically around the 12th of the following month.
The Labour Bureau, under the Ministry of Labour and Employment, compiles and publishes the other three indices (CPI-IW, CPI-AL, and CPI-RL).
Importance of CPI
The Consumer Price Index plays a vital role in economic management and policymaking:
- Measurement of Inflation: It is the official gauge of retail inflation in India, reflecting changes in consumer purchasing power.
- Monetary Policy Formulation: The RBI uses CPI (Combined) to set policy interest rates under its inflation-targeting framework.
- Wage and Pension Indexation: The government uses CPI-IW and CPI-AL to revise dearness allowance (DA), minimum wages, and pensions.
- Socio-economic Planning: Helps in assessing the cost of living and designing welfare schemes.
- Deflator in National Accounts: Used to convert nominal values into real terms for macroeconomic analysis.
CPI vs. WPI (Wholesale Price Index)
While both CPI and WPI measure inflation, they differ in scope, purpose, and data coverage:
| Feature | Consumer Price Index (CPI) | Wholesale Price Index (WPI) |
|---|---|---|
| Measures | Retail-level inflation | Wholesale-level inflation |
| Compiled by | NSO (MoSPI) | Office of Economic Adviser, DPIIT |
| Base Year | 2012 | 2011–12 |
| Coverage | Goods and Services | Only Goods |
| Reflects | Consumer perspective | Producer perspective |
| Use | Monetary policy and wage adjustments | Industry and trade analysis |
Thus, the CPI is considered a more accurate measure of inflation experienced by the general population.
Advantages of CPI
- Reflects real cost of living for consumers.
- Includes both goods and services, offering a comprehensive picture of inflation.
- Useful for social welfare, wage, and pension adjustments.
- Provides key inputs for RBI’s monetary policy decisions.
Limitations of CPI
- Limited representation of rural consumption diversity in certain regions.
- Lag in revising base year can reduce accuracy over time.
- Price data may be influenced by seasonal fluctuations.
- Does not fully capture variations in quality and consumer behaviour changes.
Recent Developments
- Efforts are underway to revise the base year of CPI to 2017–18, to align it with current consumption patterns and inflation dynamics.
- Digital methods and enhanced market coverage are being introduced for faster and more accurate data collection.
- Increasing importance is being given to core CPI (excluding food and fuel) as a stable indicator of long-term inflation trends.
Examination-Oriented Highlights
- Full Form: Consumer Price Index.
- Compiled by: National Statistical Office (NSO), Ministry of Statistics and Programme Implementation.
- Base Year: 2012 = 100.
- Main Variants: CPI (Combined), CPI-IW, CPI-AL, CPI-RL.
- Published Frequency: Monthly.
- Used By: RBI for inflation targeting under the Monetary Policy Framework.
- Major Weight: Food and Beverages (45.86% in Combined).
- Formula Used: Laspeyres Index Formula.
- Difference from WPI: Measures retail inflation and includes services.
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