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Consumer Price Index

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Consumer Price Index is a measure of change in retail prices of goods and services consumed by defined population group in a given area with reference to a base year. This basket of goods and services represents the level of living or the utility derived by the consumers at given levels of their income, prices and tastes. The consumer price index number measures changes only in one of the factors; prices. This index is an important economic indicator and is widely considered as a barometer of inflation, a tool for monitoring price stability and as a deflator in national accounts. Consumer price index is used as a measure of inflation in around 157 countries. The dearness allowance of Government employees and wage contracts between labour and employer is based on this index. The formula for calculating Consumer Price Index is Laspeyre’s index which is measured as follows;

[Total cost of a fixed basket of goods and services in the current period * 100] divided by Total cost of the same basket in the base period

The origin of Consumer Price Index can be traced to the period after first world war when there was a sharp rise in prices and cost of living. The erosion in the real wages of the workers led to a demand by the workers for compensation. This led to the conduct of socio-economic surveys among the working classes as a preliminary to the measurement of cost of living. Consumer price index numbers were known as “ Cost of Living Index Numbers” prior to July 1955. The Sixth International Conference of Labour Statisticians recommended the change in nomenclature from Cost of Living Index to Consumer Price index. The Cost of living index is a more broader term which includes not only changes in prices but several other factors like change in consumption habits and standard of living.

Presently the consumer price indices compiled in India are CPI for Industrial workers CPI(IW), CPI for Agricultural Labourers CPI(AL) and; Rural Labourers CPI(RL) and (Urban) and CPI(Rural). Consumer Price Index for Urban Non Manual Employees was earlier computed by Central Statistical Organisation. However this index has been discontinued since April 2008.The CPI(IW) and CPI(AL& RL) compiled are occupation specific and centre specific and are compiled by Labour Bureau. This means that these index numbers measure changes in the retail price of the basket of goods and services consumed by the specific occupational groups in the specific centres. CPI(Urban) and CPI(Rural) are new indices in the group of Consumer price index and has a wider coverage of population. This index compiled by Central Statistical Organisation tries to encompass the entire population and is likely to replace all the other indices presently compiled. In addition to this, Consumer Food Price Indices (CFPI) for all India for rural, urban and combined separately are also released w.e.f May, 2014.

Price data are collected from selected towns by the Field Operations Division of NSSO and from selected villages by the Department of Posts. Price data are received through web portals being maintained by the National Informatics Centre (NIC).

The Reserve Bank of India (RBI) has started using CPI-combined as the sole inflation measure for the purpose of monetary policy. As per the agreement on Monetary Policy Framework between the Government and the RBI dated February 20, 2015 the sole of objective of RBI is price stability and a target is set for inflation as measured by the Consumer Price Index-Combined.

Also See

Inflation Targeting in India



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