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What is Consumer Price Index (CPI) and How it Matters?
June 18 , 2013

Inflation is quite a common word these days; you cannot go far from it in any direction. We measure inflation through its effect - price rise. In India there are two broad indices for measuring change in prices. Wholesale Price Index or WPI reflects wholesale price of a fixed set of goods. On the other hand Consumer Price Index or CPI shows price of a basket of goods and services used by retail consumers.

WPI is used for policy-making by RBI and the government but as consumers CPI is what your family deals with on a day-to-day basis.

What is Consumer Price Index (CPI)

CPI number is computed from huge data on price of a basket of goods and services used by different categories of people in various geographical regions of the country. Consumer Price Index numbers are computed regionally as well as on all India basis every month. CPI figures of the previous month are released on the websites of 2 government ministries that release them. 

There are three broad types of CPIs- CPI for Industrial Workers, CPI for Agricultural Labourers/Rural Labourers and CPI (Rural/Urban/Combined). CPI for Urban Non-Manual Employees (UNME) existed until the centre level index was discontinued in 2008 and ultimately all-India CPI (UNME) was also discontinued in 2011.

For the remainder of this article we will focus on CPI (Rural/Urban/Combined) since it gives a more comprehensive picture of price rise across the country and among different classes of consumers. Goods and services constituting CPI are mainly 5.

The groups of items in CPI and their weightage in urban, rural and combined category are tabulated below

Group

CPI(Rural)

CPI(Urban)

CPI(Combined)

Food, beverages and tobacco

59.31

37.15

49.71

Fuel and light

10.42

8.40

9.49

Housing

-

22.53

9.77

Clothing and footwear

5.36

3.91

4.73

Miscellaneous

24.91

28.00

26.31

Total

100.00

100.00

100.00

Housing has zero weightage in rural category because its share is just about 1% there. Food, clothing and miscellaneous groups have further subgroups. Miscellaneous group includes services like education, medical care, transport and communication etc. For entire list of items in CPI you can refer to latest CPI ready reckoner mapped in Additional Resources section below.

Who's behind the computation of CPI

Various government departments and agencies work together for compiling the Consumer Price Indices. Of the three main CPIs, CPI for Industrial Workers and CPI for Agricultural Labourers/Rural Labourers are compiled and released monthly by Labour Bureau of the Labour Ministry. CPI (Rural/Urban/Combined) is compiled and released by Central Statistics Office (CSO) of the Statistics Ministry.

CSO makes use of the wide network of the Department of Posts to effectively reach out to rural consumers. Usually from each district in a state 2 villages are selected, from where data is collected from selected shops.

Some more interesting facts about Consumer Price Index 

Much more can be written about this crucial economic indicator but we would highlight just a few more interesting facts about the CPI.

  • 5,50,000 records of price data relating to rural and urban areas collected
  • Price data covers 1181 villages and 310 towns, 250 different items for price data collection
  • All PDS items and items making 1% or more of expenditure are included. These are such that are used by more than 75% of households
  • Data collected by the field workers is entered online for scrutiny and verification by CSO staff
What is CPI to you? 

Consumer Price Index is an indicator showing how price levels are changing. Ultimately you can view it as an indicator of how your spending was affected. CPI is sidelined for any decision making; WPI is used instead in our country. The reason is the new CPI is not old enough for incorporating in policies. As CPI stabilizes the RBI might swap WPI for it for indexing its Inflation Indexed Bonds. 

However there is one lesson you cannot afford to miss. Since the core of CPI is about rise in household expenditure, your long term investments should be allocated in assets that give returns above CPI rate. Else years down the line you would realize to your disappointment that your investments have not even caught with inflation. Or in other words your capital has depreciated in value. Think about it- even the RBI would benchmark returns on some of its bonds to it, why should you not?

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