The Consumer Price Index (CPI) is a price index that measures the average price of a basket of items over a given period of time. The Consumer Price Index (CPI) determines the average price paid by customers to merchants. The CPI includes necessities such as food, clothing, housing and includes services like medical care, transportation, and education. In this article, let us see what CPI is, how it is calculated, its types and components, and its significance. The topic of CPI is very important for the UPSC Economy syllabus.

What is the Consumer Price Index (CPI)?

• The consumer price index (CPI) is a metric that reflects the change in the price level of items purchased by retail customers, who are on the demand side of the economy.
• CPI can be construed to gauge the purchasing power of an economy's currency for the same reason.
• CPI is calculated for a fixed basket of goods and services that the government may or may not change from time to time.
• It is a macroeconomic indicator used to track inflation.
• It is utilized as a vital economic instrument by central and state governments, as well as the Reserve Bank of India, our country's central bank, to ensure money supply and price stability.
• The Consumer Price Index (CPI) measures price fluctuations at the consumer level.
• The CPI is divided into eight categories: education, communication, transportation, recreation, clothes, foods and beverages, housing, and medical care.
• The CPI is published by the National Statistical Office (NSO) under the Ministry of Statistics and Program Implementation.
• The CPI uses a base year set at 2011-2012.
• The CPI is published on a monthly basis.

How is CPI Calculated?

• The Consumer Price Index, or CPI, measures changes in the price of a common basket of goods and services by comparing current prices to prices from the previous year's similar time.
• CPI is calculated using the following formula:

Types of CPI

There are 4 different types of CPI measured:

CPI for Industrial Workers (CPI-IW)

• It attempts to quantify changes in the pricing of a fixed basket of products and services used by Industrial Workers over time.
• A typical working-class family from any of these seven economic sectors, ranging from industries, mines, plantations, motor transport, port, railways, and energy generation and distribution, would be the target demographic.
• The Labour Bureau compiles this list.
• This functions under the Ministry of Labour and Employment.

CPI for Agricultural Laborers (CPI-AL)

• The Labor Bureau compiles this data to help revise minimum wages for agricultural labor in different States.

CPI for Rural Labourer (CPI-RL)

• The Labour Bureau compiles this list.
• This functions under the Ministry of Labour and Employment.

CPI (Urban Non-Manual Employees) (CPI-UNME)

• This information is compiled by the Central Statistics Office (CSO), which is now known as the National Statistical Office (NSO).
• The Ministry of Statistics and Program Implementation oversees the NSO.

Base Year Revision and New Terminologies

• In its Report (2001), the National Statistical Commission (NSC), led by Dr. C. Rangarajan, proposed the compilation of CPI for rural and urban areas.
• The Standing Committee on Finance (2009-10) also accepted the NSC (2001) report (15th Lok Sabha, 6th Report on Inflation and Price Rise)
• With effect from January 2011, the Central Statistics Office (CSO), Ministry of Statistics, and Programme Implementation began issuing Consumer Price Indices (CPI) on a monthly basis for all of India and States/UTs, separately for rural, urban and combined.
• In January 2011, the CPI (R), CPI (U), and CPI (C) with Base Year 2010 were issued.
• Then in 2015, from 2010 to 2012, the base CPI was updated.

Components of CPI

The following are the primary components of CPI (C): (along with their weightage)

• Food and Beverage – 45.86
• Housing – 10.07
• Fuel and Light – 6.84
• Clothing and Footwear – 6.53
• Pan, tobacco, and intoxicants – 2.38
• Miscellaneous – 28.32

Note: Housing inflation is not factored into the CPI (R)

Significance of CPI

• As an economic statistic, the Consumer Price Index measures the inflation experienced by the end customer.
• It is also a gauge for a government's economic policy effectiveness.
• To account for price fluctuations in other economic indicators: Components of national income, for example, could be changed using CPI.
• CPI (C) has been utilized as a nominal anchor for the conduct of monetary policy in India since the RBI established Inflation Targeting.
• The Monetary Policy Committee is required to keep the CPI (C) in the range of 2% to 6%. As a result, the CPI is used to target inflation.
• In the National Accounts, CPI is also utilized as a deflator.
• The Consumer Price Index (CPI) is also used to calculate Dearness Allowance.

Why was CPI chosen instead of WPI?

• CPI was used as an inflation indicator in India from 2014, replacing WPI.
• CPI indicates the inflation rate at the consumer level which is a better indicator than the Wholesale Price Index (WPI).
• CPI includes services such as medical care and education which are not included in WPI. These services are essential to gauge the inflation rate.

Conclusion

The Consumer Price Index (CPI) is used by the Reserve Bank of India (RBI) for inflation targeting and decides its monetary policy. The base year revision to 2011-2012 is in line with the international practice where the gap between the base year is not more than 10 years and revised accordingly.

FAQs

MCQs

1. What does the Consumer Price Index (CPI) measure?

A. Wholesale price inflation
B. Price changes of consumer goods and services
C. Corporate earnings
D. Industrial production