The Consumer Price Index

Ministry of Labour & Employment

(released by the Labour Bureau)

What is consumer price index

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. CPI is a numerical estimation calculated using the rates of a sample of representative objects the prices of which are gathered periodically.

• The CPI captures changes in price level at the consumer level.
• Changes in prices at the producer level are tracked by the Wholesale Price Index (WPI).
• CPI can capture the change in the prices of services which the WPI cannot.

What is the CPI in India?

• Consumer Price Index or CPI is the measure of changes in the price level of a basket of consumer goods and services bought by households.
• Considering the WPI and CPI, the RBI will calculate the inflation in the country.

How is CPI Used?

CPI is an economic indicator. It is the most widely used measure of inflation and, by proxy, of the effectiveness of the government’s economic policy. The CPI gives the government, businesses, and citizens an idea about prices changes in the economy, and can act as a guide in order to make informed decisions about the economy.

The CPI and the components that make it up can also be used as a deflator for other economic indicators, including retail sales, hourly/weekly earnings. Additionally, it can be used to value a consumer’s dollar to find its purchasing power. Generally, the dollar’s purchasing power declines when the aggregate price level increases and vice versa.

The index can also be used to adjust people’s eligibility levels for certain types of government assistance including Social Security and it automatically provides the cost-of-living wage adjustments to domestic workers. According to the BLS, the cost-of-living adjustments of more than 50 million people on Social Security, as well as military and Federal Civil Services retirees are linked to the CPI.

Types of CPI

Note: CPI for Agricultural and Rural labourers on base 1986-87=100 is a weighted average of 20 constituent state indices and it measures the extent of change in the retail prices of goods and services consumed by the agricultural and rural labourers as compared with the base period viz ‘86-87. This index is released on the 20th of the succeeding month.

KEY TAKEAWAYS

• The Consumer Price Index measures the average change in prices over time that consumers pay for a basket of goods and services.
• CPI is the most widely used measure of inflation and, by proxy, of the effectiveness of the government’s economic policy.
• The CPI statistics cover professionals, self-employed, poor, unemployed and retired people in the country but excludes non-metro or rural populations, farm families, armed forces, people serving in prison and those in mental hospitals.
• CPI-W measures the Consumer Price Index for Urban Wage Earners and Clerical Workers while the CPI-U is the Consumer Price Index for Urban Consumers.