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Consumer Price Index (CPI): Types, Full Form, Formula | CPI UPSC Notes

By Balaji

Updated on: February 26th, 2023

Consumer Price Index, or CPI, as it is generally called, is an index measuring retail inflation in the economy, done by analyzing the price change of the most common goods and services. The Consumer Price Index 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 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. You will learn all the details about the Consumer Price Index, relevant to the UPSC Exam, in the article below.

CPI – Consumer Price Index

CPI is the measuring index of the changes in the price level of consumer goods and services bought out by households. The Consumer Price Index is the estimated calculation in numerical values using the rates of the representative sample objects gathered periodically.

The Consumer Price index notes the changes in the prices at the consumer level. In contrast, the Wholesale Price Index (WPI), calculates price changes at the producer level. The WPI cannot note the price change in the service provided, but the CPI can capture this change.

Types of CPI

In India, CPI is calculated in four ways:

  • CPI for Industrial Workers (CPI-IW)– The CPI-IW measures the price change in the fixed baskets of the consumed goods and services used by the workers of the Industries.
  • CPI for Urban Non-Manual Employees (CPI-UNME)– The data is compiled by the National Statistical Office (previously called Central Statistic Office).
  • CPI for Agricultural Labourers (CPI-AL)– The data is revised to calculate the minimum wages for the laborers in the agricultural sector living in different states.
  • CPI for Rural Labourers (CPI-RL)– Labour Bureau compiles the CPI-AL.

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

Working Process of Consumer Price Index in India

The Consumer Price Index in India 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 only the pure price.

CPI UPSC Notes

The price data of goods and services are collected periodically, and the inflation levels in the economy are calculated by using the data collected from the CPI. This is further used to compute the cost of living. Not only this, but the Consumer Price Index also provides insights into how much a consumer can spend to be on par with the price change in an economy.

Advantages of 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, Consumer Price Index is considered one of the key economic indicators. The RBI and other agencies study CPI to interpret the price change of various commodities and keep a check on inflation.

The Consumer Price Index is also useful for understanding the true value of salaries, wages, pensions, and the currency’s purchasing power and regulating prices.

Calculation of Consumer Price Index

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

When the Consumer Price Index 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.

CPI Formula

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

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

CPI is calculated for a fixed set of items, including food, apparel, housing, electronics, transportation, medical care, education, etc. India’s Consumer Price Index increased from 175.70 points in December 2022 to 176.50 points in January 2023.

CPI UPSC

The Consumer Price Index is a crucial topic in the Indian Economy section of the UPSC Syllabus. To get in-depth knowledge about this concept, one should refer to the Indian Economy Books.

Students can even take help from UPSC Previous Years’ Question Papers to get references for the questions asked on the topic of CPI.

Consumer Price Index UPSC Questions

Question: What does the consumer price index (CPI) calculate?

  1. Price of services only
  2. Price of goods only
  3. Price of both goods and services
  4. None of the above

Answer: Option C

Question: Who issues the data of the consumer price index (CPI)?

  1. Ministry of Commerce and Industry
  2. Ministry of Finance
  3. Ministry of Statistics and Program Implementation
  4. None of the above

Answer: Option C

Question: What is the base year of the consumer price index (CPI)

  1. 2001
  2. 2012
  3. 2004
  4. 2015

Answer: Option B

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