Consumer Price Index

The Consumer Price Index (CPI) measures how the retail prices of a representative basket of goods and services purchased by households change over time. Retail inflation is the percentage increase in this index, usually compared with the same month of the previous year. Unlike the Wholesale Price Index, CPI reflects prices faced by consumers and includes services.

Basket, coverage and weights

The National Statistical Office under the Ministry of Statistics and Programme Implementation compiles separate CPI-Rural, CPI-Urban and CPI-Combined indices. In the established 2012=100 series, items are grouped under food and beverages; pan, tobacco and intoxicants; clothing and footwear; housing; fuel and light; and miscellaneous goods and services.

• Each item's weight reflects its share in household consumption expenditure; weights in the 2012 series were derived primarily from the Consumer Expenditure Survey, 2011-12.
• Different rural and urban consumption patterns produce different baskets and weights; housing rent is represented only in the urban index.

Collection and construction

Retail prices are collected periodically from selected rural and urban markets and service providers. Current prices are compared with base-period prices to obtain item-level price relatives, which are combined using expenditure weights.

• At the elementary level, price relatives are combined through a geometric mean.
• Higher-level indices are aggregated using a Laspeyres-type weighted formula, so an item with a larger expenditure weight has a greater influence on overall CPI.
• The index shows relative price change from the base value of 100; it does not represent the rupee cost of the basket.

Deriving the inflation rate

Headline retail inflation is generally measured from CPI-Combined as: [(CPI in current month / CPI in the same month of the previous year) - 1] x 100. This year-on-year comparison reduces seasonal distortions that could arise from comparing adjacent months.

• Food inflation may also be tracked through the Consumer Food Price Index, while core inflation commonly refers to CPI inflation excluding food and fuel.
• The Reserve Bank of India's inflation-targeting framework uses headline CPI-Combined inflation as its inflation measure.

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