Consumer Price Index (CPI)

The consumer price index, aka. CPI, is the key gauge for inflation; it measures price increases and decreases on common group of consumer goods and services on a monthly basis. The CPI is calculated by taking a weighted average of price change for a pre-determined group of goods. The goods are weighted in order of their importance. The consumer price index is very similar, but not to be confused with, to the cost of living index which allows for substitutions of the items as prices move higher or lower.

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Wholesale Price index
WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. Wholesale Price index (WPI) is compiled and released on weekly basis at national level by the Ministry of Industry.
The WPI series, on base 1981-82, covered in all 447 commodities. With a view to revise the base year (1981-82) of WPI, a Working Group was set up by the Ministry of Industry. The Working Group submitted its report to the Government and the same has been accepted. The Working Group has recommended for shifting the base year (1981-82) of the series to 1993-94. The Ministry of Industry started releasing the WPI series on base 1993-94 from April, 2000. The series covers in all 435 commodities.
Consumer Price Index
In principle and practice, a Consumer Price Index (CPI) measures changes over time in the general level of prices of goods and services that a reference population acquire, use or pay for consumption. There are four Consumer Price Indices (CPI) released at national level. These are CPI for Urban Non-Manual Employees (UNME), CPI for Industrial Workers (IW), CPI for Agricultural Labourers (AL), and CPI for Rural Labourers (RL)). While the first one is compiled and released by the Central Statistical Organisation (CSO), Ministry of Statistics and Programme Implementation, the rest three are compiled and released by the Labour Bureau, Ministry of Labour.
The Central Statistical Organisation has been compiling Consumer Price Index Numbers for Urban Non-Manual Employees [CPI(UNME)], on monthly basis, since 1961. Using the weights, derived from the data collected through middle class family living survey (MCFLS) conducted during 1982-83, the current CPI(UNME) series on base 1984-85, is being compiled and released since November, 1987. The Index numbers are compiled using Laspeyres' Index formula.
The Labour Bureau compiles Consumer Price Index Numbers for Industrial Workers [CPI(IW)], on monthly basis, using the retail prices collected from 261 markets in 76 centres by the officials of various State Governments, Labour Commissioners, etc. The number of items in the consumption baskets of different centres generally varies between 120 to 160, depending upon the prevailing situation in each centre and the consumption pattern of the centre. The various items of goods and services are classified into six main groups namely: (i) food, (ii) pan, supari, tobacco & intoxicants, (iii) fuel & light, (iv) housing, (v) clothing, bedding & footwear, (vi) miscellaneous. The base year of the index is 1982.
The Labour Bureau also compiles Consumer Price Index Numbers both for Agricultural Labourers [CPI(AL)] and Rural Labourers [CPI(RL)], on monthly basis, using the retail prices in respect of 260 items of goods and services, collected by National Sample Survey Organisation (NSSO) from fixed markets in 600 sample villages in 20 states spread over the country. The base year of both the indices is 1986-87.

The Labour Bureau started releasing CPI(RL) series for all-India and 20 states since November, 1995. The indices for all-India and 20 states are released, on a monthly basis, with a time lag of 3 weeks. The CPI(AL) and CPI(RL) for all-India are based on the respective indices in respect of 20 states only.
Uses of Price Indices
Changes in prices, both absolute and relative, influence a wide range of economic activities, and a constant watch on prices becomes necessary for the operation and regulation of current economic policies as well as for planning and policy formulation. Temporal changes in prices are gauged by using price indices. The WPI helps in understanding the movement of prices relating to bulk transactions or purchases, which are usually for further sale. WPI is used for a wide spectrum of economic management needs, including policy formulation, deflating macroeconomic aggregates, forecasting of variables for which prices are prime indicators, and working out escalation costs of projects. Reserve Bank of India (RBI), Planning Commission, and other government agencies use WPI extensively as a major macroeconomic indicator for varied purposes. In socioeconomic research, the indices find ready use.

The Consumer Price Index (CPI) plays an important role in national policy making, both in the economic and in the social sphere. It is used for a wide variety of purposes. The CPI is the best and most well known indicator of inflation. It is the barometer of the performance of the economy and a key indicator in evaluating the results of the monetary and fiscal policy in a country. A popular function is the use of CPI for indexation of wages and social security allowances like dearness allowance. CPI for Industrial Workers is utilised mainly for Wage & Dearness allowance regulation of workers and employees. CPI is also important for formulation of social policy measures and in the area of social security and welfare allowances. Beside these, CPI is used as a deflator in national account estimates for converting values at current prices to values at constant prices.
CPI(UNME) is one of the primary indicators of price movement in the urban segment of population in India. The users of CPI(UNME) are many and varied including public, private and governmental agencies. Specifically for regulating Dearness Allowance (DA), CPI(UNME) series are used by State Governments & Public/Private Sector Undertakings/Agencies/Companies.
The official measure of inflation in the Indian economy is based on WPI. WPI measures the general level of price changes at the level of either the wholesaler or the producer; and does not take into account retail margins. As such, WPI can be said to essentially measure price changes from the production side, and not from the consumption side. Moreover, price changes in the service sector are not duly accounted for in WPI, even though they are largely influenced by inputs from the industrial sector. In contrast to a CPI, the WPI thus measures price changes at an early stage of the distribution system. This difference makes the WPI a flexible price index, and one that signal changes in the general price level. From the viewpoint of a consumer, inflation concerns the purchasing power of his money. Inflation estimates given by a CPI are considered more representative of temporal changes in consumer prices.
There are many structural differences in the WPI and CPIs released at national level, which account for the difference in the point-to-point inflation rate. These are as given below:
(i) The WPI is designed to measure the temporal price changes of wholesale transactions of all the commodities in the country whereas the CPI measures the changes in consumer (retail) prices in respect of items in the consumption basket of goods and services, on which an average family of industrial worker/urban non-manual employee/household of agricultural/rural labourer spends its budget. While the former is production/output oriented, the latter has orientation towards the family/household budget of the target population.
(ii) Not only the composition of the baskets of the WPI and the CPI is different, but the weights of items in the basket are also different. The weights of items in the WPI have been assigned in proportion to their share in the total value of transaction (output) in the economy. In case of CPI, weights are in proportion to their share in the total consumption expenditure of the family of industrial worker/urban non-manual employee/household of agricultural/ rural labourer in a selected centre/state.
(iii) The WPI is a single national index compiled at the national level. The basis of inclusion of items in the basket for WPI, is their importance in the national economy. The basis of selection of items in the consumption basket for CPI is their relative consumption expenditure and their popularity among the families of industrial workers/urban non-manual employees/households of agricultural/rural labourer in a selected centre/village.
(iv) CPIs take into account the retail margins which have a direct bearing on retail price movements.
(v) The services like health, education etc. are not included in the WPI. As such, the WPI leaves out of its scope yet another area where consumers are increasingly spending more money.
(vi) Housing is one of the broad groups both in CPI(IW) and CPI(UNME), for which the data on shelter cost (rent cost) is collected regularly from a fixed sample of tenements. A chain base index are compiled on half-yearly basis for this group, which, in turn, is integrated into the general CPI. No such group exists in WPI, CPI(AL) and CPI(RL).

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India on Friday adopted the new Consumer Price Index (CPI) that will reflect the actual movement of prices at the micro-level. As per the new series, the CPI has increased to 106 in January from a base of 100 in 2010 (inflation of 6 per cent), but the government has chosen not to mention the inflation figure, pointing out that the exact level could be arrived only next year.
The Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation, has introduced the new series of consumer price indices for all-India, and States and union territories separately for rural, urban and combined for the purpose of intra temporal price comparison with effect from January, 2011, with 2010 as the base year.
“Indices for some States/UTs are not being released since adequate number of schedules for these States/UTs could not be received. These indices will be revised at the time of release of provisional indices for March 2011. Therefore, for one year this practice will be continued till the series gets stabilised and adequate timely receipt of price data is achieved. Since these indices are being introduced for the first time, annual inflation rates have not been compiled,” an official statement said.
The initial data showed that retail inflation stood at 6 per cent in January this year. However, inflation, as measured by the Wholesale Price Index — which remains the top benchmark — stood at 8.23 per cent in January. India is one of the few countries in the world using the WPI as benchmark. Experts say the new CPI is likely to help policymakers like the Reserve Bank of India in better framing of decisions.
The consumer indices have been released for five major groups — food, beverages and tobacco; fuel and light; housing; clothing, bedding and footwear; and miscellaneous.
As per the new data, food, beverages and tobacco went up to 108 on a national basis in January, while fuel and light were at 106. Clothing, bedding and footwear in the month under review stood at 107 while housing remained constant at 100. The miscellaneous items went up by six points to 106.
As per the new data, inflation has been the most in Kerala, Orissa and Meghalaya, where CPI overall stood at 108 in January from a base of 100 in 2010 (inflation of 8 per cent). Even richer states like Maharashtra, Gujarat, Haryana, Delhi and Punjab reported a rise of only 4-6 per cent in CPI on an annual basis during the month under review.