The Consumer Price Index (CPI) is a price index that measures changes in the price level of a group of consumer goods and services bought by households. It captures changes in price level at the consumer level. It estimates the differences in the price of a basket of items over a given period of time. In simple terms, CPI measures the changes over time in general prices of goods and services that households purchased (or acquired) for the purpose of consumption.
The CPI is an important economic indicator. It is widely considered as a barometer of inflation, a tool for monitoring price stability and as a deflator in the national accounts.
Consumer Price Index (CPI) is a primary tool used by the Reserve Bank of India (RBI) to estimate inflation targets during the Monetary Policy Committee (MPC) meetings. In April 2014, RBI adopted the CPI as its key measure of inflation.
CPI is a marked-based index used to calculate the retail inflation of a country. It measures the changes in the prices paid by the consumer at the retail level. It estimates price changes from the perspective of a retail buyer.
The CPI calculates the difference in the price of commodities and services such as food, clothing, housing, education, medical care, transportation, electronics, etc., which consumers buy for use. The CPI has several sub-groups, including food and beverages, housing and clothing, bedding and footwear, fuel and light.
How does Consumer Price Index help?
The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to adjust for the effect of inflation, index the real value of wages, salaries, and pensions; to regulate prices; and to deflate monetary magnitudes to show changes in real values. In most countries, the Consumer Price Index is one of the most closely watched national economic statistics.
How is the Consumer Price Index (CPI) calculated?
The Consumer Price Index (CPI) is a statistical estimate formed using the prices of a sample of representative items whose prices are collected periodically. The CPI estimates the changes in the price of a common basket of goods and services by comparing current prices with prices prevalent during the same period in a previous year. The CPI is usually computed monthly (or quarterly in some countries).
The formula for calculating CPI:
CPI = (Cost of the market basket in a given year / Cost of the market basket in the base year) x 100
Components of the Consumer Price Index (CPI)
The CPI measures changes in price by comparing, through time, the cost of a fixed basket of commodities. Items for the CPI basket of goods and services are classified across categories like food and beverages, clothing, housing, fuel and light, etc. These categories further include sub-groups. The primary components of the Consumer Price Index (CPI) are as follows:
- Food & Beverages:
- Cereals and products.
- Meat and fish.
- Egg.
- Milk and products.
- Oils and fats.
- Fruits.
- Vegetables.
- Pulses and products.
- Sugar and Confectionery.
- Spices.
- Non-alcoholic beverages.
- Prepared meals, snacks, sweets, etc.
- Pan, Tobacco & Intoxicants.
- Clothing & Footwear:
- Clothing.
- Footwear.
- Housing.
- Fuel & Light.
- Miscellaneous:
- Household goods and services.
- Health.
- Transport and communication.
- Recreation and amusement.
- Education.
- Personal care and effects.
Consumer Food Price Index (CFPI): Out of 12 sub-groups contained in the ‘Food and Beverages’ group, CFPI is based on ten sub-groups, excluding ‘Non-alcoholic beverages’ and ‘Prepared meals, snacks, sweets, etc.
Types of Consumer Price Index (CPI)
At the national level, there are four types of Consumer Price Index (CPI), as follow:
| Sr. no | Types of CPI | Compiled by | Base Year |
|---|---|---|---|
| 1. | CPI (Rural/Urban/Combined) | National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) | The Base year for the CPI is 2012. NSO releases the All India Consumer Price Index (CPI) on Base: 2012=100 and the corresponding Consumer Food Price Index (CFPI) for Rural (R), Urban (U) and Combined (C). |
| 2. | CPI for Industrial Workers (CPI-IW) | Labour Bureau under the Ministry of Labour & Employment | The Base Year for CPI-IW is 2001. Recently, the Ministry of Labour & Employment revised the base year of the CPI-IW from 2001 to 2016 to reflect the changing consumption pattern, giving more weightage to spending on health, education, recreation and other miscellaneous expenses while reducing the weight of food and beverages. |
| 3. | CPI for Agriculture Labourers (CPI-AL) | Labour Bureau under the Ministry of Labour & Employment | The Base Year for CPI-AL is 1986-87. Labour Bureau releases the All-India CPI for Agriculture Labourers (CPI-AL) on Base: 1986-87=100. |
| 4. | CPI for Rural Labourer (CPI-RL) | Labour Bureau under the Ministry of Labour & Employment | The Base Year for CPI-RL is 1986-87. Labour Bureau releases the All-India CPI for Rural Labourer (CPI-RL) on Base: 1986-87=100. |
CPI (Rural/Urban/Combined)
- CPI (Rural/Urban/Combined) reflect the changes in the prices of various goods and services consumed by the urban and rural population.
- The indices are compiled at State/UT and all-India levels.
- The Base Year for CPI is 2012.
- The National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) releases the All India Consumer Price Index (CPI) on Base: 2012=100.
- NSO compiles CPI separately for rural, urban, and combined sectors on a monthly basis.
Consumer Food Price Index (CFPI)
- CFPI measures changes in retail prices of food products consumed by a defined population group.
- National Statistical Office (NSO) compiles and releases the CFPI in three categories – rural, urban and combined – separately on an all-India basis.
- The CFPI is also calculated on a monthly basis.
- The Base Year for CFPI is 2012.
- Out of 12 sub-groups in the ‘Food and Beverages’ group, CFPI is based on ten sub-groups, excluding ‘Non-alcoholic beverages’ and ‘Prepared meals, snacks, sweets etc.’
CPI for Industrial Workers (CPI-IW)
- CPI-IW measures variations in the prices of a fixed basket of goods and services utilized by industrial workers over a time period.
- Labour Bureau under the Ministry of Labour & Employment complies and releases the CPI-IW.
- Labour Bureau has been compiling CPI-IW every month on the basis of retail prices collected from 317 markets spread over 88 industrially important centres in the country. The index is compiled for 88 centres and All-India and is released on the last working day of the succeeding month.
- CPI-IW is calculated at the base year 2001. Recently, the Ministry of Labour & Employment revised the Base year for CPI-IW from 2001 to 2016.
- The government uses this index for computing wages in organized sectors.
CPI for Agricultural Labourer (CPI-AL)
- CPI-AL measures the changes in the prices of the commodity basket consumed by agricultural labourers.
- Labour Bureau under the Ministry of Labour & Employment complies and releases the CPI-AL.
- The Base Year for CPI-AL is 1986-87.
- CPI-AL is used for revising minimum wages for agricultural labour in different States.
CPI for Rural Labourer (CPI-RL)
- CPI-RL measures the changes in the prices of the basket of goods and services consumed by rural labourers.
- Labour Bureau under the Ministry of Labour & Employment also complies and releases the CPI-RL.
- The Base Year for CPI-RL is 1986-87.
- CPI-RL is used for revising minimum wages for rural labourers.
Also Read:
- Consumer Food Price Index (CFPI).
- Wholesale Price Index (WPI).
- Difference between Consumer Price Index and Wholesale Price Index.