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12 Feb 2026 : Consumer Price Index (CPI)

Article 3: Consumer Price Index (CPI)

Why in news: Inflation matters because it directly affects daily household expenses. The Consumer Price Index (CPI) measures this by tracking prices of regularly used goods and services, reflecting changes in costs of food, rent, fuel, and other basic needs.

 

Key Details

  • Inflation affects everyday household expenses.
  • CPI measures retail price changes of commonly used goods and services.
  • Reflects cost of food, rent, fuel, and essentials.
  • Acts as an official measure of cost of living.
  • Widely used indicator of inflation trends.

 

What is CPI?

  • Consumer Price Index (CPI) measures the average change in retail prices of goods and services consumed by households.
  • It reflects the cost of living and purchasing power of consumers.
  • It is one of the most widely used indicators of inflation.

 

Who Compiles CPI in India?

  • Compiled by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI).
  • Data is collected from both rural and urban areas.
  • Released on a monthly basis.

 

Types of CPI in India

  • CPI (Combined) – For both rural and urban areas (most important measure).
  • CPI (Rural) – Rural population consumption pattern.
  • CPI (Urban) – Urban consumption pattern.
  • CPI for Industrial Workers (CPI-IW) – Compiled by Labour Bureau.
  • CPI for Agricultural Labourers (CPI-AL) and CPI for Rural Labourers (CPI-RL).

 

Components of CPI Basket

Major groups include:

  • Food & Beverages
  • Housing
  • Clothing & Footwear
  • Fuel & Light
  • Miscellaneous (health, education, transport, recreation, etc.)
  • Food has the highest weight in CPI (especially in rural areas).

 

Role in Monetary Policy

  • CPI (Combined) is used by the Reserve Bank of India (RBI) as the primary inflation indicator.
  • Under the inflation targeting framework:
    • Target: 4% inflation
    • Tolerance band: 2% – 6%
  • RBI adjusts repo rate based on CPI trends.

 

How CPI is Calculated

  • Based on a fixed basket of goods and services.
  • Uses Laspeyres Index formula.
  • Compares current prices with base year prices.

Formula: CPI = (Cost of basket in current year ÷ Cost of basket in base year) × 100

 

Importance of CPI

  • Measures inflation
  • Determines DA (Dearness Allowance) revisions
  • Influences salary and wage negotiations
  • Impacts interest rates
  • Used for economic policy planning

 

Limitations

  • May not capture regional price variations perfectly.
  • Fixed basket may not immediately reflect changing consumer behavior.
  • Does not fully measure asset price inflation.

 

Conclusion

The Consumer Price Index (CPI) serves as a crucial bridge between macroeconomic policy and everyday life. By capturing changes in the cost of essential goods and services, it guides monetary policy, wage revisions, and economic planning. Despite certain limitations, CPI remains the most reliable indicator of retail inflation and purchasing power in India.

 

Descriptive question:

“The Consumer Price Index (CPI) is central to India’s inflation targeting framework.”

Discuss the significance of CPI in monetary policy formulation. Also examine its limitations as a measure of inflation in India. (15 marks, 250 words)