Consumer Price Index or CPI as it is commonly called is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers. Called market basket, CPI is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education, etc. Note that the price data is collected periodically, and thus, the CPI is used to calculate the inflation levels in an economy. This can be further used to compute the cost of living. This also provides insights as to how much a consumer can spend to be on par with the price change.
Remember, CPI is different from WPI, or Wholesale Price Index, which measures inflation at the wholesale level.
How does Consumer Price Index help?
The Reserve Bank of India and other statistical agencies study CPI so as to understand the price change of various commodities and keep a tab on inflation. CPI is also a helpful pointer in understanding the real value of wages, salaries and pensions, the purchasing power of a country’s currency; and regulating prices.
Economists are in charge of collecting data by surveying households on their buying patterns, most purchased items, and daily expenses.
Who maintains Consumer Price Index in India?
In India, there are four consumer price index numbers, which are calculated, and these are as follows:
- CPI for Industrial Workers (IW)
- CPI for Agricultural Labourers (AL)
- CPI for Rural Labourers (RL) and
- CPI for Urban Non-Manual Employees (UNME).
While the Ministry of Statistics and Program Implementation collects CPI (UNME) data and compiles it, the remaining three are collected by the Labour Bureau in the Ministry of Labour.
How is Consumer Price Index calculated?
The CPI is calculated with reference to a base year, which is used as a benchmark. The price change pertains to that year. Remember, when you calculate the CPI, note that the price of the basket in 1 year has to be first divided by the price of the market basket of the base year. Then, it is multiplied by 100.
Consumer Price Index formula:
CPI = (Cost of basket divided by Cost of basket in the base year) multiplied by 100
CPI’s annual percentage change is also used to assess inflation. In India, the base years of the current series of CPI(IW), CPI(AL) and CPI(RL), are 1982, 1986-87 and 1984-85, respectively.