CPI is Consumer Price Index, and is a globally used measure for inflation. India also uses CPI to measure inflation, but the WPI or the Wholesale Price Index is more widely watched.
India launched a new Consumer Price Index in February 2011, and Dr. Ajay Shah lists down 4 ways in which this is meaningfully different from the old CPI.Â
- It is disaggregated at the rural and urban levels. The new overall all India CPI is a weighted average of the two. This is in contrast with the earlier CPIs which represented subsets of the population (industrial workers, agricultural labourers, rural labourers, etc.).
- The new series has better geographical as well as commodity coverage. The basket of consumer goods has risen from 25 to 250.
- The weights have been derived from the 61st round of the NSS consumer expenditure survey (2004-05).
- Data for the urban CPI will be collected from 310 towns (compared to 78 in the current CPI-IW, for all India). The rural CPI will use data from 1181 villages. Field officers of the NSSO and the Department of Post will be the price collection agents for urban and rural centers respectively.
The new index reported its highest ever inflation number for January 2013Â when the provisional all India CPI came to 10.79%. This was higher than the 10.56% number for December 2012, and also higher than the WPI number that was reported earlier.
Let’s look at three things that help get a deeper understanding of CPI. The first one is CPI components, and the second one is how this measure is calculated, and finally how is this different from WPI.
Components of India’s CPI
The CPI is calculated for rural areas, and urban areas, and then a combined weight is used to determine the national average. Here are the constituents of CPI.
| Sub group/group | Rural | Urban | Combined |
| Cereals and products | 19.08 | 8.73 | 14.59 |
| Pulses and products | 3.25 | 1.87 | 2.65 |
| Milk and milk products | 8.59 | 6.61 | 7.73 |
| Oils and fats | 4.67 | 2.89 | 3.9 |
| Egg, fish and meat | 3.38 | 2.26 | 2.89 |
| Vegetables | 6.57 | 3.96 | 5.44 |
| Fruits | 1.9 | 1.88 | 1.89 |
| Sugar etc | 2.41 | 1.26 | 1.91 |
| Condiments and spices | 2.13 | 1.16 | 1.71 |
| Non- alcoholic beverages | 2.04 | 2.02 | 2.03 |
| Prepared meals etc | 2.57 | 3.17 | 2.83 |
| Pan, tobacco and Intoxicants | 2.73 | 1.35 | 2.13 |
| Food, beverages and tobacco | 59.31 | 37.15 | 49.71 |
| Fuel and light | 10.42 | 8.4 | 9.49 |
| Clothing and bedding | 4.6 | 3.34 | 4.05 |
| Footwear | 0.77 | 0.57 | 0.68 |
| Clothing, bedding and footwear | 5.36 | 3.91 | 4.73 |
| Housing | Â | 22.53 | 9.77 |
| Education | 2.71 | 4.18 | 3.35 |
| Medical care | 6.72 | 4.34 | 5.69 |
| Recreation and amusement | 1 | 1.99 | 1.43 |
| Transport and communication | 5.83 | 9.84 | 7.57 |
| Personal care and effects | 3.05 | 2.74 | 2.92 |
| Household requisites | 4.48 | 3.92 | 4.3 |
| Others | 1.12 | 0.99 | 1.06 |
| Miscellaneous | 24.91 | 28 | 26.31 |
| Total | 100 | 100 | 100.00 |
The most obvious thing about these components is how the weight for housing is zero in rural areas, but it’s a very high 22.53% in urban areas. If anyone has any insights as to why that is, please leave a comment.
How is CPI data collected?
Surveys are conducted to collect price data in urban and local areas. In the urban areas, 310 towns have been identified in the urban areas where the data is collected, and similarly there are 1,182 villages from where data is collected for rural areas. Interestingly, the post office workers are used to collect data in rural areas while employees of NSSO collect data in urban areas. So, this index is a result of survey done every month that helps establish the index values.
Difference between the WPI index and CPI Index
I did a post on the constituents of the WPI index a couple of years ago but I believe the constituents haven’t changed since then. Here are the components of the WPI index.
| Primary Articles | |
| Food Articles | 15.4025 |
| Non Food Articles | 6.1381 |
| Minerals | 0.4847 |
| Sub Total | 22.0253 |
| Fuel, Power, Light & Lubricants | |
| Coal Mining | 1.7529 |
| Mineral Oils | 6.9896 |
| Electricity | 5.4837 |
| Sub Total | 14.2262 |
| Manufactured Products | |
| Food Products | 11.5378 |
| Beverages, Tobacco and Tobacco Products | 1.3391 |
| Textiles | 9.7999 |
| Wood and Wood Products | 0.1731 |
| Paper and Paper Products | 2.0440 |
| Leather and Leather Products | 1.0193 |
| Rubber and Plastic Products | 2.3882 |
| Chemicals and Chemical Products | 11.9312 |
| Non-Metallic Mineral Products | 2.5159 |
| Machinery and Machine Tools | 8.3633 |
| Transport Equipment and Parts | 4.2948 |
| Basic Metals and Alloys | 8.3419 |
| Sub Total | 63.7485 |
| Grand Total | 100.00 |
I do not know how it has continued for so long? But I am surprised by the fact that our economic policies , particularly interest rates are decided by these indexes. They do not represent the average proportion of spends in urban areas. There is too much focus on food items, which does not affect the urban population because food items constitute just about 20% of household budgets. In rural areas the food items do not affect the people adversely because they consume largely what they produce. In fact , if MSP is increased substantially then relative economic status of rural population will improve providing fillip to overall economy. The interest rates are being kept high on pretext that inflation will go up if interest rates are lowered . However , food items and most of the other consumption items except housing are not purchased with loans. Therefore lower interest rates will improve liquid , improve capital formation and investment , provide fillip to economy, higher MSP will resolve problems of bank loan recovery in agricultural segment . WPI and CPI can not be basis of interest rates and the policy of high interest rates being followed by RBI & inadequate increase in MSP is detrimental to economy than being positive .
Thanks for the simple and clear post …
Any plz tell me how to calculate consumer price index in india ..with example …required for inflation
Some thoughts:
1. Why should “pan tobacco and intoxicants” have a higher weight than say “fruits” or “sugar”?
2. In fact, why are items such as “pan, tobacco and intoxicants” there in the list at all?
3. Why does “transport and communication” for urban folk have such a high weight?
The idea is to give weight to those things in the proportion that people spend their income on. So that’s why these weights. If you remove pan, and people spend so much money on pan and tobacco, then your index won’t be accurate because it doesn’t cover one big thing that people spend their money on.
Nice post!!. Always wondered how the inflation will be calculated and was never heard of CPI or WPI. Now everything is clear. Thanks a lot.
“Housing group has not been given any weightage in the rural areas CPI as its share is around 1% and it has been distributed to other groups on pro rata basis. CPI (Urban) has a weightage of 22.53% in respect of Housing group.”
source: http://pib.nic.in/newsite/erelease.aspx?relid=69636
Thanks!
Good and educative as usual.
It is also good for each individual family to keep an account of regular monthly expenses and arrive at its own CPI.My family consists of self and wife,both senior citizens.We stay in Bangalore in our own house and have no liabilities and no dependents.
Thank you.
I think you have brought up this point several times in earlier comments as well. And it should be obvious to anyone reading how their inflation will be different from yours if they rent a place or have kids that go to school.