Consumer Price Index – CPI 

14 Jul 2023 Consumer Price Index – CPI 

This article covers “Daily Current Affairs” and the topic details “Consumer Price Index”. The topic “Consumer Price Index” has relevance in the “Indian Economy” section of the UPSC CSE exam.

For Prelims:

What is CPI? What is its basket? What are different versions? 

For Mains:

GS3: Indian Economy and Issues related to it 

Why in the news?

Recent reports show that Retail Inflation denoted by Consumer Price Index has risen to a three-month high of 4.81 per cent.

Consumer Price Index

A consumer price index (CPI) measures changes in the prices of a basket of consumer goods and services purchased by households. It measures changes in the price level for the specified consumers in the particular region.

There are different versions of CPI in India such as– 

All-India Combined Consumer Price Index (CPI-Combined) 

• The Reserve Bank of India (RBI) uses the All-India Combined Consumer Price Index (AICPI) as its primary measure of consumer price changes. 
• The index is now being calculated with a base year of 2012 = 100, and several improvements have been made in accordance with international standards. 
• The basket of items and weighting diagrams for the revised series were created using the Modified Mixed Reference Period (MMRP) data from the Consumer Expenditure Survey (CES) of the 68th Round of the National Sample Survey (NSS) in 2011-12.

The weights in CPI-C are as follows:

Core Inflation

• Core inflation is a measure of inflation that excludes the prices of food and energy. 
• It is calculated by subtracting the prices of food and energy from the overall inflation rate. This is done to get a better understanding of the underlying trend in inflation, as the prices of food and energy can be volatile.
• While in CPI-C, major fuel items such as ‘petrol for vehicle’ and ‘diesel for vehicle’, which have relatively large weights, are not included in ‘fuel and light’. These fuel items are classified under “transport and communication”, a subcategory of the “miscellaneous” group.

Core Inflation =
Overall Inflation – (Weight of Food and Beverages + Weight of Fuel and Light)

Refined Core Inflation

• The Economic Survey 2021-22 constructed a “refined” core inflation rate by excluding main fuel items such as petrol, diesel, and lubricants and other fuels for vehicles, as well as food and beverages and fuel and light, from the headline retail inflation rate.

Refined Core Inflation =
Overall Inflation – (Weight of Food and Beverages + Weight of Fuel and Light + Weight of Transport Fuel Items)

Need for Changes in CPI Basket: 

Reflecting evolving consumption patterns: 

• As societies progress and economic conditions evolve, people’s consumption patterns shift. New products and services emerge, and the relative importance of different expenditure categories changes. 

Improving accuracy: 

• The CPI is used as a measure of inflation, which has significant implications for economic policy and decision-making. 
• To make informed policy decisions, it is crucial to have an accurate measure of inflation that aligns with the current consumption patterns. 

Addressing changing relative prices: 

• The relative prices of goods and services can fluctuate over time. Some items may become relatively more expensive, while others may become relatively cheaper. 
• If the CPI basket does not account for these changes in relative prices, it may not accurately reflect the cost of living for consumers.

Accounting for technological advancements: 

• Technological advancements introduce new products and services into the market, which can significantly impact consumer behavior and spending patterns. 
• For example, the rise of digital services, internet usage, and other technology-related expenses may not be adequately captured in the current CPI basket. 

Addressing biases and flaws: 

• The current CPI basket may have biases or flaws that need to be addressed. For example, the weightage assigned to certain items may be disproportionate or not reflective of their actual importance in household budgets. 

Ultimately, an accurate and up-to-date CPI basket is essential for policymakers, economists, and society as a whole to have a clear understanding of inflation, consumer spending patterns, and the economic well-being of the population. Only through adapting and evolving the CPI can we accurately measure the true cost of living and make informed decisions that align with the dynamics of the modern economy.

Sources: 

How the CPI basket conceals the inflation picture – The Hindu 

Yojna daily current affairs eng med 14th July 2023

Q1. With reference Consumer Price Index (CPI), consider the following statements: 

1. Food and beverages has the highest weight in the CPI Basket while Fuel & light has the lowest weight. 
2. The Labour Bureau of India publishes the CPI for Urban Non- Manual Employees. 
3. Core inflation is a measure of inflation that excludes volatile prices of food and energy.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 3 only 

(d) 1, 2 and 3

Answer: (c) 

Q2. Consider the following statements:

1. Refined core inflation is a measure of inflation that excludes the prices of volatile items like fuel and light, but includes food and beverages.
2. The Reserve Bank of India uses the Combined Consumer Price Index as its main indicator of consumer price changes.
3. CPI (IW) is used for calculating dearness allowance for Central Government Employees.

How many of the abovementioned statement/s is/are correct ?

(a) Only one 

(b) Only two 

(c) Only three 

(d) None 

Answer: (b)

Q3. Explain the need for a revised CPI basket, challenges faced, and implications for accurate inflation measurement.

Gaurav N