What is Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in retail prices of basic goods and services purchased by households. The index tracks these prices at the item level and their rural and urban price movements, as well as the price movement of the total basket of goods and services at the rural, urban, and all-India levels.

Also Read| India’s retail inflation drops to 6.71% in July

The index gives varying weights to different things in the basket. The weight of a single item might also differ between the urban and rural indexes.

Also Read| What is Insolvency and Bankruptcy Code (Amendment) Bill 2021?

A country’s inflation rates are determined using the CPI. This may then be used to calculate the cost of living. This also reveals how much a consumer may pay to keep up with the price shift.

Also Read| Explained: Why has RBI allowed international trade settlement in Rupee

The CPI is computed with reference to a base year that serves as a benchmark. The price change is only for that year. When computing the CPI, remember that the price of the basket in one year must first be divided by the price of the market basket in the base year. It is then multiplied by 100.

Also Read| How inflation affects RBI’s interest rate policy

CPI = (Price of basket in current period / Price of basket in base period) x 100

Also Read| What is Insolvency and Bankruptcy Code 2016?

CPI is studied by the Reserve Bank of India and other statistical agencies in order to understand price changes in various commodities and to keep track of inflation. CPI is also useful in determining the true worth of wages, salaries, and pensions, as well as the purchasing power of a country’s currency and in adjusting prices.

Also Read| Explained: Difference between RBI’s accommodative, neutral & hawkish stance

There are four consumer price index figures calculated in India:

CPI for Industrial Workers (IW)

CPI for Agricultural Labourers (AL)

CPI for Rural Labourers (RL) and

CPI for Urban Non-Manual Employees (UNME).

Also Read| How the US Federal Reserve’s rate hike impacts RBI policy: Explained

The CPI (UNME) data is compiled by the Ministry of Statistics and Program Implementation, while the Ministry of Labour’s Labor Bureau gathers the data for the remaining three.