Consumer Price Index [CPI]

By : Neha Dhyani

Updated : Jun 3, 2022, 6:04

Consumer Price Index [CPI] as it is generally called, is an index measuring the retail inflation in the economy. This is done by analysing the change in prices of most common goods and services.

What is the Consumer Price Index [CPI]?

A Consumer Price Index [CPI] is designed to assess the changes over time in the general level of retail prices of certain household goods and services purchased for consumption. These changes affect the real purchasing power of consumers' wealth and their income.

Traditionally, CPI was used to measure changes in the living costs of workers. This was done to compensate their wages for the fluctuating price levels.

Consumer Price Index [CPI] Working Process

The Consumer Price Index [CPI] measures price changes by comparing the cost of a fixed set of commodities over time. The set is based on the expenses of a target population over a reference period. Since the set contains commodities of constant or identical quality and quantity, the index reflects the only pure price.

The price data is collected periodically, and the CPI is used to calculate the inflation levels in an economy. This is further used to compute the cost of living. This also provides insights on how much a consumer can spend to be on par with the price change in an economy.

Advantages of Consumer Price Index [CPI]

Over the years, CPIs have been commonly used as a macroeconomic indicator of inflation and a tool by the Central Bank and the Government to monitor price stability and target inflation. Hence, CPI is considered one of the key economic indicators.o

The RBI and other agencies study CPI to interpret the price change of various commodities and keep a check on inflation. CPI is also a useful indicator for understanding the true value of salaries, wages, pensions, and the currency's purchasing power and for regulating prices.

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How is the Consumer Price Index Maintained in India?

In India, four Consumer Price Index [CPI] numbers are calculated -

  • CPI for Industrial Workers (IW)
  • CPI for Rural Labourers (RL)
  • CPI for Agricultural Labourers (AL)
  • CPI for Urban Non-Manual Employees (UNME)

The work of the Ministry of Statistics and Program Implementation is to collect CPI (UNME) data and compile it similarly; the work of the Labour Bureau in the Ministry of Labour is to collect the remaining three CPI data.

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Consumer Price Index [CPI] Calculation

The CPI is calculated regarding a base year, which is used as a benchmark. Price Reference Year (Base Year) has been selected to be the calendar year 2012. The price change pertains to that year.

When the CPI is calculated, the price of the set in 1 year is divided by the price of the market set of the base year; then, it is multiplied by 100.

Consumer Price Index [CPI] Formula -

CPI = (Cost of the market basket in the year/cost of the market basket in the base year) x 100

The annual percentage change of CPI is also used to evaluate inflation. In India, the base years of the current series of CPI(IW), CPI(RL), and CPI(AL) are 1982, 1984-85, and 1986-87, respectively.

Consumer Price Index in India jumped to 166.10 points in February from 165.70 points in January of 2022. CPI is calculated for a fixed set of items which includes food, apparel, housing, electronics, transportation, medical care, education, etc.

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FAQs on Consumer Price Index [CPI]

Q1. Which year is the base year of the Consumer Price Index [CPI]?

The base year for Consumer Price Index [CPI] is 2012.

Q2. What is the index number for the base year for Consumer Price Index [CPI]?

The index number is taken for the base year, i.e., 2012 is 100 for Consumer Price Index [CPI].

Q3. What does Consumer Price Index [CPI] is inflation mean?

Consumer Price Index [CPI] as it is generally called, is an index measuring the retail inflation in the economy. This is done by analysing the change in prices of most common goods and services.

Q4. What is the formula to calculate Consumer Price Index [CPI]?

To find the Consumer Price Index [CPI] in any period, divide the cost of the market basket in that period by the cost of the same market basket in the base period multiplied by 100.