Consumer Price Index Number, Functions, Types

Consumer Price Index (CPI) is a statistical measure that tracks changes in the average prices of a fixed basket of goods and services typically consumed by households over time. It reflects the cost of living and inflation faced by consumers. The basket usually includes items like food, clothing, housing, transportation, and healthcare. CPI is calculated by comparing the current cost of this basket to its cost in a base year, and is expressed as an index number. Policymakers, businesses, and economists use CPI to assess inflation, adjust wages, and frame economic policies affecting the general population.

Functions of Consumer Price Index (CPI):

• Measures Cost of Living

CPI serves as a primary indicator of the changes in the cost of living over time. It reflects how much more or less consumers need to spend to maintain the same standard of living as in the base year. By comparing the index values across time periods, one can assess whether the purchasing power of money has increased or decreased. This function helps individuals and households understand how inflation or deflation is affecting their everyday expenses and adjust their consumption or savings accordingly.

• Indicator of Inflation

One of the most important functions of the CPI is to act as a key measure of inflation. It helps economists and policymakers track the rate at which the general price level of consumer goods and services is rising. A consistent increase in CPI indicates inflation, while a decrease may suggest deflation. This information is essential for central banks like the Reserve Bank of India to make decisions regarding interest rates, money supply, and other monetary policies to stabilize the economy and control price fluctuations.

• Wage and Salary Adjustments

CPI is often used to adjust wages, salaries, pensions, and other allowances to maintain the real income of workers and pensioners. This process is called “indexation.” Governments and private organizations use CPI to decide cost-of-living allowances (COLA) so that employees’ earnings reflect the real value after accounting for inflation. Without such adjustments, inflation could erode purchasing power over time. Thus, CPI ensures that the standard of living of employees and retirees remains relatively unaffected by price changes in the economy.

• Formulation of Economic Policies

Governments and financial institutions use the CPI to formulate fiscal and monetary policies. For instance, if the CPI shows rapid inflation, the government may implement contractionary policies, such as reducing public spending or increasing taxes, to control demand. Conversely, deflation might prompt expansionary measures. The CPI, therefore, plays a crucial role in helping policymakers take informed decisions aimed at ensuring economic stability, encouraging investment, and protecting the interests of consumers. It is also used to assess the effectiveness of past economic policies.

• Deflator for National Income

CPI is used as a deflator to convert nominal national income into real national income. Nominal income refers to income at current prices, while real income reflects income adjusted for changes in price level. By dividing the nominal income by the CPI and multiplying by 100, economists can determine the real growth of a country’s economy over time. This helps distinguish between an increase in national income due to actual economic growth and that due to inflationary effects, thus providing a more accurate economic analysis.

• Comparative Analysis

CPI enables comparison of price level changes over different regions, sectors, or time periods. For instance, CPI for rural areas can be compared with that for urban areas to understand the impact of inflation across demographics. It can also be used to analyze the inflation rate in different countries, helping economists assess global trends. These comparisons are valuable for multinational businesses, investors, and policymakers who need to make strategic decisions based on inflation data in various regions or industries.

Types of Consumer Price Index (CPI):

1. CPI for Industrial Workers (CPI-IW)

CPI for Industrial Workers (CPI-IW) measures changes in the retail prices of goods and services consumed by industrial workers. It is widely used for wage revisions in public sector undertakings, banks, and government jobs. The Labour Bureau, under the Ministry of Labour and Employment, publishes this index. It represents a working-class family that primarily spends on food, housing, fuel, clothing, and education. This index is used to revise Dearness Allowance (DA) and is also important for policy decisions related to labor welfare and social security in India’s organized industrial sector.

2. CPI for Agricultural Labourers (CPI-AL)

CPI for Agricultural Labourers (CPI-AL) reflects changes in the cost of living for agricultural labor households in rural India. It was introduced to understand the consumption pattern and inflationary effects faced by landless agricultural workers, who are among the most economically vulnerable. The index includes food, fuel, clothing, housing, and miscellaneous expenses. The Labour Bureau also publishes this index, and it is used to formulate rural wage policies, set minimum wages, and revise schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). It also helps in assessing the poverty levels in rural areas.

3. CPI for Rural Labourers (CPI-RL)

CPI for Rural Labourers (CPI-RL) is broader than the CPI-AL, as it covers all types of rural workers including agricultural laborers, artisans, and other manual laborers. This index gives a more inclusive picture of inflation in rural areas. Published monthly by the Labour Bureau, it includes price data for food, fuel, clothing, education, medical care, and transportation. It helps the government in framing rural development programs, setting minimum wages, and evaluating the impact of inflation on the rural working class. It is also useful for tracking the real income trends and consumption behavior of rural households beyond agriculture.

4. CPI for Urban Non-Manual Employees (CPI-UNME)

CPI for Urban Non-Manual Employees (CPI-UNME) is designed to capture the price changes faced by urban households engaged in non-manual (white-collar) professions such as clerical jobs, teachers, and lower-tier administrative workers. Although this index was previously in use, it has now been largely discontinued and replaced by the more comprehensive CPI-Urban published by the Central Statistics Office (CSO). Earlier, it was mainly used for wage revisions and urban economic studies. This index focused on urban expenditure patterns in sectors like housing, food, transport, and recreation, reflecting inflation for the salaried middle class in urban settings.

5. CPI (Rural, Urban, and Combined)

Since 2011, India publishes three unified CPIs—CPI (Rural), CPI (Urban), and CPI (Combined)—compiled by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI).

• CPI (Rural) captures inflation experienced by rural consumers.

• CPI (Urban) captures inflation in cities and towns.

• CPI (Combined) is a weighted average of both and is the official inflation index used by the Reserve Bank of India (RBI) for monetary policy decisions.

These indices are published monthly and are considered the most comprehensive indicators of retail inflation in India today.