Consumer Price Index of India, Definition, Formula, Base Year

Consumer Price Index of India, Definition, Formula, Types, Base Year

Consumer Price Index measures the change in prices consumers pay for goods and services. Read about the Consumer Price Index of India, its Definition, Formula, Types & Base Year for the UPSC Exam.

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Consumer Price Index

The Consumer Price Index (CPI) in India measures the average change in prices of a fixed basket of goods and services consumed by households over time. It measures the Inflation rate in India and is commonly used by policymakers, economists, and market analysts to monitor price changes and evaluate the effectiveness of Monetary Policy.

Consumer Price Index of India

The Consumer Price Index in India is calculated and released by the Ministry of Statistics and Programme Implementation on a monthly basis, and it covers both rural and urban areas. The CPI is also used as a base for the calculation of various other economic indicators, such as the Wholesale Price Index (WPI) and the GDP Deflator.

Read about: Index Ranking of India 2022

Consumer Price Index Formula

The formula to calculate the Consumer Price Index (CPI) is as follows:

CPI = (Total cost of basket of goods and services in the current period / Total cost of basket of goods and services in the base period) x 100

In this formula, the base period is a fixed period of time against which the current period is compared. The basket of goods and services refers to a list of items that represent the typical consumption pattern of a household, such as food, clothing, housing, transportation, and medical care.

The total cost of the basket of goods and services is the sum of the prices of each item in the basket, multiplied by its respective weightage. The weightage of each item reflects its importance in the consumption pattern of households.

Read about: GDP of Indian States

Consumer Price Index Calculation

In India, the Consumer Price Index (CPI) is calculated and released by the Ministry of Statistics and Programme Implementation. The CPI is calculated using the Laspeyres formula, which involves selecting a fixed basket of goods and services that are commonly consumed by households and tracking the change in the prices of these items over time.

The basket of goods and services used for the calculation of CPI in India is based on the consumption pattern of households in both rural and urban areas. The basket is divided into various categories, such as food and beverages, housing, clothing, transportation, and healthcare, with each category assigned a specific weightage based on its importance in the overall consumption pattern.

The prices of each item in the basket are collected from a sample of retail outlets and markets across the country on a monthly basis. The data is then compiled and analyzed to calculate the CPI for each category and for the overall basket. The CPI is expressed as an index number, with a base year of 2012.

The CPI is an important indicator of inflation in the economy, and it is used by policymakers, economists, and market analysts to track price changes and make informed decisions regarding monetary and fiscal policies.

Read about: Purchasing Power Parity

Consumer Price Index Types

Here’s a table with the different types of Consumer Price Index in India, along with their importance:

S. No.	Type	Importance
1	CPI (Combined)	Covers both rural and urban areas
2	CPI (Urban)	Covers only urban areas
3	CPI (Rural)	Covers only rural areas
4	CPI (Industrial)	Covers workers in the organized industrial sector
5	CPI (Agricultural)	Covers agricultural labourers and rural workers

Each type of CPI is based on a different basket of goods and services and has a different weightage assigned to various categories, depending on the consumption patterns of the target population. The CPI (Combined) is the most widely used CPI in India and is considered to be the most representative measure of inflation in the economy.

Read about: Basel Norms

Difference Between Consumer Price Index and Wholesale Price Index

Here’s a table highlighting the key differences between Consumer Price Index (CPI) and Wholesale Price Index (WPI):

Feature	Consumer Price Index (CPI)	Wholesale Price Index (WPI)
Definition	Measures the change in prices of goods and services consumed by households.	Measures the change in prices of goods sold in bulk by producers and wholesalers.
Coverage	Covers both urban and rural areas.	Covers only goods sold in bulk in the primary and wholesale markets.
Computation	Based on a fixed basket of goods and services consumed by households.	Based on a fixed basket of goods sold in bulk by producers and wholesalers.
Weightage	The weightage is assigned to various categories based on the consumption pattern of households.	The weightage is assigned to various categories based on the value of production.
Inflation	Reflects the price changes at the retail level.	Reflects the price changes at the wholesale level.
Purpose	Used to measure inflation, calculate the Cost of Living Index, and adjust salaries, wages, pensions, and government subsidies.	Used to measure inflation in the production sector, calculate Producer Price Index, and adjust prices of goods and services sold by producers and wholesalers.

Both CPI and WPI are important indicators of inflation in the economy and are used by policymakers, economists, and market analysts to monitor price changes and evaluate the effectiveness of monetary policy. However, they differ in their coverage, computation, weightage, and purpose, reflecting the different perspectives they represent in the economy.

Read More: Types of Inflation

Consumer Price Index Base Year

In India, the base year for the Consumer Price Index (CPI) is 2012. The CPI measures the change in the prices of a fixed basket of goods and services consumed by households over time. By fixing a base year and calculating the index relative to that year, policymakers, economists, and market analysts can track the inflation rate in the economy and make informed decisions regarding monetary and fiscal policies.

The base year is typically updated periodically to ensure that the basket of goods and services used to calculate the CPI remains relevant and representative of the consumption patterns of households.

Read about: Indian Financial System

Consumer Price Index UPSC

The Consumer Price Index (CPI) is an important topic for UPSC aspirants as it is a key indicator of inflation in the economy, which is a critical factor in the macroeconomic policies of the country. Understanding the CPI is also important for analyzing the impact of inflation on various sectors and segments of the population, and for making informed decisions regarding monetary and fiscal policies.

Aspirants preparing for the UPSC exam can expect questions about the CPI and its computation, coverage, and significance in the Indian economy. The CPI is also a part of the UPSC Syllabus under the Economics section and is covered in UPSC Online Coaching programs and mock tests.

Read about: India’s GDP Growth Rate

Consumer Price Index FAQs

What is the CPI in India?

The CPI in India is an index that measures the average change in the prices of a basket of goods and services consumed by households over time.

What is the Consumer Price Index?

The Consumer Price Index (CPI) is a measure of the average change in the prices of goods and services consumed by households.

How is CPI measured in India?

CPI is measured in India by collecting price data from a sample of retail outlets and using it to calculate the index.

Who releases consumer price index?

The Ministry of Statistics and Programme Implementation, Government of India releases the Consumer Price Index in India.

What are the components of consumer price index Upsc?

The components of the Consumer Price Index in India include food and beverages, clothing and footwear, housing, fuel and light, transport, and miscellaneous items.

What is WPI & CPI?

WPI (Wholesale Price Index) measures the average change in the prices of goods traded in wholesale markets, while CPI measures the average change in the prices of goods and services consumed by households.