CPI basket conceals the inflation picture

Why in the News?

India's consumer price index (CPI) inflation rose to 4.81% in June 2023, higher than expectations but still below the RBI's upper tolerance limit of 6%. The spike was driven by a less supportive base and a surge in vegetable prices. 

1.      India's consumer price index (CPI) inflation rises for the first time in five months to 4.81% in June 2023.

2.   Also, the rise in inflation is higher than the street's expectations of 4.58%, nevertheless, the CPI print is still below RBI's upper tolerance limit of 6%.

3.   CPI was pushed higher than expected due to a less supportive base and the onset of a surge in vegetable prices. Food inflation spiked to 4.49% in June.

What is CPI?

The Consumer Price Index (CPI) is a price index that measures the average price of a basket of items over a given period of time. The Consumer Price Index (CPI) determines the average price paid by customers to merchants. The CPI includes necessities such as food, clothing, housing and includes services like medical care, transportation, and education.

How is CPI calculated?

The Consumer Price Index, or CPI, measures changes in the price of a common basket of goods and services by comparing current prices to prices from the previous year's similar time.

CPI is calculated using the following formula:

Types of CPI

There are 4 different types of CPI measured:

1.       CPI for Industrial Workers (CPI-IW)

• It attempts to quantify changes in the pricing of a fixed basket of products and services used by Industrial Workers over time.
• A typical working-class family from any of these seven economic sectors, ranging from industries, mines, plantations, motor transport, port, railways, and energy generation and distribution, would be the target demographic.
• The Labour Bureau compiled this list. This functions under the Ministry of Labour and Employment.

2.      CPI for Agricultural Laborers (CPI-AL)

           ·         The Labor Bureau compiles this data to help revise minimum wages for agricultural labour in different
                States.

3.      CPI for Rural Labourer (CPI-RL)

           ·         The Labour Bureau compiled this list. This functions under the Ministry of Labour and Employment.

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

• This information is compiled by the Central Statistics Office (CSO), which is now known as the National Statistical Office (NSO).
• The Ministry of Statistics and Program Implementation oversees the NSO.

Base Year Revision and new terminologies

• In its Report (2001), the National Statistical Commission (NSC), led by Dr. C. Rangarajan, proposed the compilation of CPI for rural and urban areas.
• The Standing Committee on Finance (2009-10) also accepted the NSC (2001) report (15th Lok Sabha, 6th Report on Inflation and Price Rise)
• With effect from January 2011, the Central Statistics Office (CSO), Ministry of Statistics, and Programme Implementation began issuing Consumer Price Indices (CPI) on a monthly basis for all of India and States/UTs, separately for rural, urban and combined.
• In January 2011, the CPI (R), CPI (U), and CPI (C) with Base Year 2010 were issued.
• Then in 2015, from 2010 to 2012, the base CPI was updated.

Components of CPI:

The following are the primary components of CPI (C): (along with their weights)

·         Food and Beverage – 45.86;

·         Food and Beverage – 45.86;

·         Housing – 10.07;

·         Fuel and Light – 6.84;

·         Clothing and Footwear – 6.53;

·         Pan, tobacco, and intoxicants – 2.38;

·         Miscellaneous – 28.32;

Note: Housing inflation is not factored into the CPI (R)

Significance of CPI:

·    CPI (C) has been utilized as a nominal anchor for the conduct of monetary policy in India since the RBI established Inflation Targeting.

·       The Monetary Policy Committee is required to keep the CPI (C) in the range of 2% to 6%. As a result, the CPI is used to target inflation.

·        In the National Accounts, CPI is also utilized as a deflator.

·       The Consumer Price Index (CPI) is also used to calculate Dearness Allowance.

CPI chosen instead of WPI:

·        CPI was used as an inflation indicator in India from 2014, replacing WPI.

·     CPI indicates the inflation rate at the consumer level which is a better indicator than the Wholesale Price Index (WPI).

·       CPI includes services such as medical care and education which are not included in WPI. These services are essential to gauge the inflation rate.