CPI: Consumer Price Index
Inflation is a crucial indicator of an economy’s health, impacting the cost of goods, services, and the value of a country’s currency. The Consumer Price Index (CPI) is the primary metric used to measure inflation at the retail level by tracking changes in the prices of essential goods and services consumed by households over time.
Understanding the Consumer Price Index (CPI)
The CPI measures inflation by monitoring the price changes in a fixed basket of goods and services, including transportation, food, healthcare, and education. This basket represents the average consumption patterns of households. The CPI is calculated by comparing the cost of this basket in the current year to a base year, with the base year set at an index value of 100. The annual percentage change in CPI indicates the rate of inflation or deflation in the economy.
How CPI is Calculated and Measured in India
In India, CPI is calculated by tracking the prices of 697 goods across rural, urban, and national levels to capture a balanced view of price changes. Due to the country’s diverse landscape, prices can vary significantly between rural and urban areas. Different goods are weighted differently in the CPI basket depending on their importance in rural versus urban areas. For example, food and beverages have a higher weight in rural CPI than in urban CPI. The CPI is released in various series, such as CPI for Industrial Workers (IW), Agricultural Labourers (AL), and both Urban and Rural CPIs, compiled by the Labour Bureau and the Central Statistical Office (CSO).
Importance of CPI
CPI is vital for understanding inflation’s impact on consumers’ purchasing power and the cost of living. It is a key metric used by the Reserve Bank of India to formulate monetary policy, aiming to keep inflation within a target range of 2-6%. Additionally, CPI helps determine the dearness allowance for government employees and assesses the effectiveness of economic policies.
CPI vs. WPI
While CPI measures inflation at the consumer level, the Wholesale Price Index (WPI) measures it at the production level, tracking price changes at the factory gate. WPI considers factors like manufacturing products, primary articles, and fuel. Both CPI and WPI are essential for providing a comprehensive view of inflation’s impact on different income segments and guiding government policies.