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Home / IAS Preparation / Consumer Price Index

Consumer Price Index (CPI): Need, Types, Importance & More | UPSC Notes

Last Updated on Nov 27, 2024
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The Consumer Price Index CPI is a statistical measure used to track changes in the average price level of goods and services consumed by households over time. It provides insights into inflation and the cost of living, serving as an important economic indicator. By monitoring the CPI, policymakers, businesses, and individuals can assess the impact of price changes on purchasing power. This can help them make informed decisions regarding monetary and fiscal policies, wage adjustments, and budgeting. The CPI captures the price movements of a basket of commonly purchased goods and services, reflecting the spending patterns of households.

Consumer Price Index CPI is one of the most important topics for UPSC IAS Examination. 

In this article on the Consumer Price Index CPI UPSC, we shall discuss what it really is, how it is calculated, its types, and its importance. This will be very useful for aspirants in the UPSC Prelims Exam.

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General Studies Paper III

Topics for UPSC Prelims

Definition of Consumer Price Index (CPI), Types of CPI, Difference between CPI and WPI, Use of CPI in Policy Making

Topics for UPSC Mains

Historical Evolution and Development of CPI in India, Calculation Methodology and Components of CPI, CPI's Role in Economic Policy, CPI vs Other Measures of Inflation, Challenges and Controversies in the Calculation and Application of CPI, Recent Trends and Major Changes in CPI

What is the Consumer Price Index CPI?

The CPI is the measurement of the variations in the price level of a group of consumer goods and services which are usually bought by households of a particular region or a country. CPI is nothing but an estimation based on numbers which is calculated on the basis of the prices of a small sample of objects which is gathered on a periodic basis. The CPI estimates the changes in the level of prices at the basic consumer level. Whereas the changes in the prices of commodities at the level of producers is calculated by the wholesale price index. While the Consumer Price Index CPI can calculate the changes in the prices of goods and services, the wholesale price index can only calculate the changes in the prices of goods but not in the prices of services.

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Need for the Consumer Price Index CPI

The CPI is used as an important indicator of the economic situation in a country and is the main tool used to measure the inflation levels of a region. It is also used by the Reserve Bank of India as the primary tool to measure the inflation and decide on the monetary policies in the upcoming time period. It provides a better analysis of the economic situation to various stakeholders like the government, the central bank of a country (RBI in India’s case), the businesses and also the ordinary citizens to plan their economic activities in a better manner.

The CPI can also be used as an index to calculate the exact and real values of the wages, pensions and salaries of various personnel working in different sectors of the economy and also to regulate the prices and to adjust the inflation and deflation targets of a country. The government can also adjust its budgetary allocation based on the CPI targets and does plan the expenditure and revenue estimates in a better and efficient manner. This will ultimately help to provide a stimulus to the economic potential of the country by enhancing the economic productivity in a particular time period based on the better analysis of the economic situation and potential of the country during a particular time period. This will ultimately lead to enhancing the prospects of the Atma Nirbhar Bharat Abhiyan and thereby help India to achieve the target of $ 5 trillion economy by 2024.

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How is the Consumer Price Index calculated?

The consumer price index is the measurement of the variations in the price level of a group of consumer goods and services which are usually bought by households of a particular region or a country. The consumer price index for the CPI estimates the changes in the level of price of a common set of goods and services by comparing those prices with the prices which were present in the same period during the previous year.

Formula for calculating Consumer Price Index CPI

CPI = (Cost of the Market Basket in a Given Year / Cost of the Market Basket in a Base Year) * 100

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Types of Consumer Price Index CPI in India

Types of Consumer Price Index CPI in India

Type of CPI

Features

CPI for Agricultural Labourers (CPI-IW)

It is compiled by the Labour Bureau with the basis objective of revising the minimum wages of the agricultural labours in different states of India.

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

It is compiled by the Central Statistics Office (CSO) which comes under the National Statistical Office (NSO) now.

CPI for Rural Laborers (CPI-RL)

It is also compiled by the Labour Bureau.

CPI for Industrial Workers (CPI-AL)

It also measures the variations in the prices of a fixed set of goods and services which are used by the Industrial Workers over a fixed period of time.

The average working class family linked to any of the seven sectors of the economy, namely the factories, motor transport, mines, railways, electricity generation, ports, etc are the target group of this index.

It is also calculated by the Labour Bureau.

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Importance of Consumer Price Index CPI

CPI, which stands for Consumer Price Index, is an important economic indicator used to measure inflation and price changes in a basket of goods and services consumed by households. It provides valuable information about the purchasing power of consumers and the overall cost of living.

The importance of CPI lies in its ability to reflect changes in the general price level of an economy. Policymakers closely monitor CPI to assess the inflationary trends and make informed decisions regarding monetary policy, fiscal policy, and welfare programs.

The Reserve Bank of India (RBI), as part of its monetary policy framework, uses CPI as a key parameter to determine the appropriate level of interest rates.

CPI and Repo Rate

The repo rate, which is the rate at which the central bank lends to commercial banks, is adjusted based on the prevailing CPI inflation rate. Higher CPI inflation may prompt the central bank to raise interest rates to curb inflationary pressures. Lower CPI inflation may lead to interest rate cuts to stimulate economic growth.

The relationship between CPI and repo rates highlights how CPI acts as a guide for central banks in setting interest rates to maintain price stability and support overall economic objectives. By closely monitoring CPI and adjusting repo rates accordingly, policymakers aim to achieve optimal inflation control, promote economic stability, and foster sustainable economic growth.

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Key Takeaways for UPSC Aspirants

  • Definition and Purpose: The Consumer Price Index (CPI) measures the average change in prices over time that consumers pay for a basket of goods and services, reflecting the cost of living and inflation.
  • Components of CPI: CPI includes various categories such as food and beverages, housing, apparel, transportation, medical care, recreation, education, and other goods and services, providing a comprehensive measure of household expenditure patterns.
  • CPI vs. WPI: The Wholesale Price Index (WPI) measures price changes at the wholesale level. The CPI focuses on the retail prices that consumers face, making it a direct indicator of inflation’s impact on the public.
  • Calculation and Base Year: CPI is calculated by comparing the current price of a basket of goods and services to the price of that basket in a base year. The base year is periodically updated to reflect changes in consumption patterns.
  • Significance for Policymakers: CPI is crucial for government and central bank policymakers to design economic policies. This includes adjusting interest rates, formulating fiscal policies, and indexing social security payments.
  • Different CPIs: There are multiple CPI measures in India, including CPI for Industrial Workers (CPI-IW), CPI for Agricultural Labourers (CPI-AL), and CPI for Rural Labourers (CPI-RL), catering to different segments of the population.
  • Impact on Economy: CPI fluctuations affect the purchasing power of consumers, wage adjustments, and cost of living. High CPI inflation can erode purchasing power, while deflation can signal economic downturns.
  • Data Collection and Release: The Ministry of Statistics and Programme Implementation (MoSPI) in India is responsible for collecting data and releasing the CPI on a monthly basis, ensuring transparency and timely information for economic analysis.

We hope that all your doubts regarding the Consumer Price Index will be cleared after going through this article. You can download the Testbook App now to check out various other topics relevant to the UPSC IAS Exam.

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Consumer Price Index CPI UPSC FAQs

CPI stands for Consumer Price Index. It is a statistical measure used to track changes in the average price level of goods and services consumed by households over time.

The Consumer Price Index numbers for Industrial Workers (CPI-IW) are used to measure changes in the cost of living and inflation specifically for industrial workers in India.

CPI index price refers to the numerical value assigned to the Consumer Price Index, which indicates the relative level of prices compared to a base period.

The Consumer Price Index (CPI) is used to calculate inflation. Inflation is the rate at which the general level of prices for goods and services is rising and subsequently eroding the purchasing power of currency.

The Consumer Price Index (CPI) in India is calculated and published by the Ministry of Statistics and Programme Implementation, through the National Statistical Office (NSO).
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