An increase in the prices of goods and services refers to inflation. In India, inflation is often discussed in terms of consumer price index (CPI), a comprehensive measure for estimating price changes of goods and services that households purchase for daily consumption. Thus, the consumer price index is an essential tool to evaluate inflation and deflation in the country. Changes in the CPI are assessed to track inflation over a period and to compare inflation rates between different countries.
Consumer Price Index: Definition
Consumer Price Index refers to the measure of changes in prices of a basket of consumer goods and services purchased by households, denoting the consumption expenditure in an economy.
CPI depicts the changes in price level at the consumer level. The changes in prices at the producer level are assessed by the Wholesale Price Index (WPI). With CPI, the change in the prices of services can be measured, unlike WPI.
How is the Consumer Price Index calculated?
Consumer Price Index (CPI) measures the changes in price of a fixed basket of goods and services by comparing with prices prevalent during the same period in a previous year.
The CPI is a numerical estimate based on the rates of a sample of representative items, the prices of which are collected periodically. The basket is periodically updated to reflect changes in consumer spending habits.
Consumer Price Index can be calculated based on the following formula:
CPI = (Cost of market basket in a given year / the cost of market basket in the base year) x 100
Types of Consumer Price Index
CPI for Industrial Workers (CPI-IW)
The CPI-IW measures the variations over a period in prices of a basket of goods and services utilised by industrial workers. It is compiled by the Labour Bureau, Ministry of Labour & Employment.
The target group includes an average working-class family from the seven sectors of the economy such as factories, mines, plantations, motor transport, port, railways to electricity generation and distribution.
CPI for Agricultural Labourers (CPI-AL)Â
The Labour Bureau collates the CPI-AL to revise minimum wages for agricultural labour across different states.
CPI for Rural Labourer (CPI-RL)Â
This data is compiled by the Labour Bureau and covers the households of rural labourers, including agricultural labourer households.
CPI (Urban Non-Manual Employees) (CPI-UNME)
This data is compiled by the Central Statistics Office (CSO), now the National Statistical Office (NSO).
The CPI for Agricultural and Rural labourers on base 1986-87 = 100 is the weighted average of 20 constituent state indices. It assesses the extent of change in retail prices of goods and services consume by the agricultural and rural labourers in comparison to the base period 1986-87. This index is published on the 20th of the succeeding month.
Uses of Consumer Price Index
The CPI tracks the retail prices for a particular commodity at a certain level, the movement of prices of goods and services at rural, urban, and at all-India level. To measure inflation, the increase in CPI is measured in terms of percentage change over the same period the previous year. If prices have fallen, it is referred to as negative inflation or deflation. When there is inflation, the CPI will rise over a period.
The Reserve Bank of India (RBI) uses the CPI as a macroeconomic indicator of inflation, with its role in maintaining price stability in the economy. The Consumer Price Index determines the periods of deflation or inflation for consumers in their ever day living expenses.
Further, the CPI is used to assess the purchasing power of the nation’s currency, regulate rates, and understand the real value of salaries, wages, and pensions. It helps determine economic health and is based on the weighted average of the commodities’ prices thus, a useful tool is assessing the cost of the standard of living.
FAQs
How is CPI used to measure inflation?
The Consumer Price Index assesses inflation by monitoring the changes in price buyers pay for a basket of goods and services over a period.
What is the difference between CPI and inflation?
The CPI is an economic indicator used to measure inflation, while inflation refers to the increase in prices of goods and services.
How is inflation calculated?
Inflation is calculated based on the formula: (Past date or ending CPI – Current date or beginning CPI) / Current date or beginning CPI. Multiply the result by 100 to obtain the inflation rate as a percentage.
What does a high CPI mean?
A high CPI is an indicator of higher inflation.
What are the benefits of CPI?
Consumer Price Index serves as an economic indicator used to measure inflation. The CPI provides the government, citizens, and businesses an indication about the price changes in an economy.
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