What Does Consumer Price Index - CPI Mean?
A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.
Sometimes referred to as "headline inflation."
What is CPI?
The Consumer Price Index (CPI) is a "measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services."
In other words, it indicates the cost of living for a typical consumer, but it's not a straight measurement of living costs,
What is the CPI used for?
Because the CPI indicates prices changes—both up and down—for the average consumer, the index is used as a way to adjust income payments for certain groups of people.
Persistent inflation continues to be a concern in India. Of the many measures of inflation we have, the Consumer Price Index for Agricultural Labourers (CPI-AL) estimates the pressure of price rise in rural areas. The CPI-AL data provide monthly inflation for 20 states using the consumption basket of agricultural labourers with the base year of 1986-87. Though the base year is quite out-dated, the new consumer price index for rural areas with the base year of 2010 that began last January has no time series available. With all its constraints, comparison of the CPI-AL inflation over time and across states can give a reasonably good picture of the pressures in rural areas.
Dividing the last 25 years into five-year segments, the period between 1991 and 1996 stands out with the highest annual average inflation for CPI-AL at 11.57 per cent, followed by the recent period 2006-2011 at 9.9 per cent. The ten-year period 1996-2006 saw the lowest levels of inflation in the last two and a half decades. The rise in the past three years (2008-11) has been led by inflation in food and fuel groups at 12.1 per cent and 12.8 per cent respectively, up from the 6.9 per cent and 6.2 per cent recorded in the previous three years.
Food items constitute the largest group in the index with 69.71 per cent weight, and fuel and light have an 8.35 per cent weight in the index. Two other categories of paan, supaari, tobacco and intoxicants and clothing, bedding and footwear also had significantly higher inflation over 2008-11 compared to the previous three years, while the category of miscellaneous items – medical care, education, transport charges, personal care goods and services and other basics like soaps, utensils, lanterns and so on – shows only a marginal increase.
A state-wise comparison shows that over the period 2005-08 – in which CPI-AL inflation averaged 6.4 per cent – Rajasthan, Uttar Pradesh and Punjab registered inflation of more than 7.5 per cent, while Tamil Nadu and Kerala had less than five per cent inflation on an average per year.
The sharp increase in inflation shows up during the past three years (2008-11) in which just four of the 20 states had average annual inflation of less than 10 per cent — Uttar Pradesh, Meghalaya, Himachal Pradesh and Tripura. At the top of the table is Bihar with 14.8 per cent average inflation a year, followed by Haryana and Karnataka with 13.2 per cent.
The highest increase in inflation between these two periods was recorded in Bihar, with Karnataka, Kerala and Tamil Nadu just behind. On the other hand, CPI-AL inflation in Rajasthan and Uttar Pradesh, which had the highest inflation in the 2005-08, showed a marginal increase in the subsequent period.
It should be mentioned that in the India index, the dominant item in the food group is rice with 24 per cent weight. And firewood is the main item of consumption within the fuel and light category. These households, therefore, live at basic levels of goods and services. With practically no savings, high inflation in these basic items hits these households harder than the data would suggest.