What is CPI-based inflation?

In March this year, inflation in the US had peaked to 8.5% -- the highest in the last 40 years -- before scaling down a bit. Several other countries too are reeling under high inflation. And some of them, like Sri Lanka, are on the brink of economic collapse.

India too has not remained untouched. Led by rising food and energy prices, the country’s retail inflation rate, as measured by the Consumer Price Index (CPI), jumped to a near eight-year high in April.

According to data released by the Ministry of Statistics and Programme Implementation, at 7.9%, the annual retail inflation was the highest in 95 months in April. The last time the inflation print was higher than this level was in May 2014, when the figure stood at 8.33%.

CPI numbers were originally introduced to give a measure of changes in the living costs of workers, so that their wages were in tune with the changing prices. 

However, over the years, it has been widely used as a macroeconomic indicator of inflation and also as a tool by the government and the central bank for targeting inflation and monitoring price stability. 

CPI is also used as a deflator in national accounts. It is released at 5:30pm on the 12th of every month for numbers relating to the previous month.

Inflation is the measure of change in the average price of services and commodities, done at regular intervals. It indicates a decrease in the purchasing power of a unit of a nation’s currency as the products and services get more expensive. 

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CPI is an indicator of inflation. It measures the percentage change in the price of a basket of goods and services consumed by households. Similarly, the Wholesale Price Index (WPI) measures changes at the wholesale price levels.

To measure inflation, we estimate how much CPI has increased in terms of percentage change over the same period the previous year. If prices have fallen, it is known as deflation.
 

Economists believe that low, stable, and predictable inflation is good for an economy. 

India’s central bank, the Reserve Bank of India, pays very close attention to CPI inflation in its role of maintaining price stability in the economy.  

The RBI has been mandated by the government to maintain retail inflation at 4% with a margin of 2% on either side. And the central bank is answerable to the policymakers if it misses its target for three consecutive quarters.

The CPI is designed to measure the changes over time in the general level of retail prices of selected goods and services that households purchase for the purpose of consumption. 

Such changes affect the real purchasing power of consumers’ income and their welfare. The CPI measures price changes by comparing, through time, the cost of a fixed basket of commodities. The basket is based on the expenditures of a target population in a certain reference period. The CPI basket has six broad groups with different weights ascribed to them. 

The Food and Beverages component in the CPI basket, combined for rural and urban, has the highest weightage at 45.86%. The weight of Clothing and Footwear is 6.53%. Fuel and light is 6.84%, housing is 10.07%, pan, tobacco and intoxicants is 2.38% and 

Each group has categories, sub-groups and sections. For example, the food and beverages group is made up of two categories. The food category has sub-groups like cereals and products, meat and fish, egg, fruits etc.

In April, inflation in food and beverages rose to 8.1% while fuel and light inflation breached the double-digit mark at 10.8%.

Separately, the government also compiles the Consumer Food Price Index (CFPI) as the weighted average of sub-groups like cereals, milk and products spices etc. Food inflation as measured by the CFPI rose to a 17-month high of 8.38% in April.