Consumer Price Index (CPI), Calculation, Types, Components, Issues, Importance

What is Consumer Price Index (CPI)?

The Consumer Price Index (CPI) is an important economic indicator that measures the average change in prices of goods and services used by households over time. It helps in understanding whether the cost of living is increasing or decreasing in an economy. CPI reflects price changes at the consumer or retail level, which directly affects common people.

CPI is calculated using prices of a fixed basket of goods and services such as food, clothing, fuel, housing, education, and healthcare. India’s retail inflation, measured by CPI stood at 1.33% in December 2025, indicating relatively stable consumer prices during that period.

• CPI measures inflation at the consumer level.
  ➤ It shows how price changes affect household expenditure and purchasing power.
• CPI includes both goods and services.
  ➤ This makes CPI more realistic because services like healthcare and education are major expenses.
• CPI is used by the Reserve Bank of India (RBI) for inflation targeting.
  ➤ RBI adjusts interest rates based on CPI data to control inflation and maintain economic stability.

Base Year Revision of CPI

The base year is the reference year used to compare price changes over time. Currently, India uses 2012 as the base year for CPI calculation. However, consumption patterns have changed significantly due to urbanisation and digital growth.

The government is revising the base year to 2024, based on the latest Household Consumption Expenditure Survey (2023-24). This revision aims to make CPI more accurate and representative of modern consumption habits.

How is Consumer Price Index (CPI) Calculated?

CPI is calculated by comparing the cost of a fixed basket of goods and services in the current year with the cost in the base year. This comparison helps measure the percentage increase or decrease in prices.

Also Read: Cash Reserve Ratio

CPI Formula

CPI = (Cost of Basket in Current Year ÷ Cost of Basket in Base Year) × 100

Steps in CPI Calculation

• Selection of Market Basket
  ➤ A representative basket of goods and services used by households is selected.
• Price Collection
  ➤ Prices of selected items are collected from rural and urban markets across India.
• Assigning Weightage
  ➤ Each item is given weight based on how much households spend on it.
• Price Comparison
  ➤ Current prices are compared with base year prices to calculate inflation.

Types of Consumer Price Index in India

India uses different types of Consumer Price Index (CPI) to measure inflation for various population groups. These indices help the government and policymakers understand price changes affecting specific sections of society and design suitable wage, welfare, and economic policies.

Types of Consumer Price Index in India

India uses different types of Consumer Price Index (CPI) to measure inflation for various population groups. These indices help the government and policymakers understand price changes affecting specific sections of society and design suitable wage, welfare, and economic policies.

1. CPI Combined (Rural + Urban)

• Meaning: CPI Combined measures overall retail inflation for both rural and urban populations in India. It provides the most comprehensive picture of inflation in the country.
• Base Year: 2012, used as the headline inflation indicator.
• Purpose: Used by the Reserve Bank of India (RBI) for inflation targeting and monetary policy decisions.
• Compiled By: National Statistical Office (NSO).
• Coverage: Includes goods and services consumed by households across India.

2. CPI for Industrial Workers (CPI-IW)

• Meaning: CPI-IW measures changes in prices of goods and services used by industrial workers. It reflects inflation affecting working-class families in industrial sectors.
• Base Year: 2016, updated to reflect modern consumption patterns of industrial workers.
• Target Group:  Workers from factories, mines, plantations, railways, ports, motor transport, and electricity sectors.
• Purpose: Used for Dearness Allowance (DA) revision and wage adjustments for government and industrial employees.
• Compiled By: Labour Bureau, Ministry of Labour and Employment.

3. CPI for Agricultural Labourers (CPI-AL)

• Meaning: CPI-AL measures inflation faced by agricultural labourers. It tracks changes in cost of living for farm workers.
• Base Year: 2019, helps reflect updated rural consumption patterns.
• Purpose: Used to fix minimum wages for agricultural labourers. Helps in designing rural welfare and social security schemes.
• Special Feature: Earlier calculated as a weighted average of 20 state indices.
• Compiled By: Labour Bureau.

4. CPI for Rural Labourers (CPI-RL)

• Meaning: CPI-RL measures price changes affecting rural labour households. It reflects cost of living for labourers working in rural non-agricultural sectors.
• Base Year: 2019, updated to capture changing rural consumption patterns.
• Purpose: Used for fixing minimum wages in rural areas. Helps evaluate rural livelihood and poverty conditions.
• Compiled By: Labour Bureau.

5. CPI for Urban Non-Manual Employees (CPI-UNME)

• Meaning: CPI-UNME measures price changes affecting urban salaried employees working in non-manual jobs. It reflects inflation experienced by middle-class urban households.
• Compiled By: Central Statistical Office (CSO), now part of National Statistical Office (NSO).
• Purpose: Helps track lifestyle and service-related expenditure in urban areas. Useful for salary structure and economic research.

Organisations Responsible for Consumer Price Index (CPI)

The Consumer Price Index (CPI) in India is prepared and released by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI). The NSO collects price data from various markets across urban and rural areas to ensure accurate inflation measurement. Earlier, different agencies like the Labour Bureau prepared CPI for specific worker groups, but now NSO releases the combined CPI for better consistency.

Components of CPI Basket in India

The CPI basket in India consists of various goods and services that represent the daily consumption pattern of households. It helps in measuring changes in the cost of living by tracking price variations in essential items used by consumers.

• Food and Beverages – 45.86%
  Includes cereals, vegetables, milk, fruits, pulses, and processed food items. It has the highest weight as food forms the largest share of household expenditure.
• Miscellaneous – 28.32%
  Covers services like healthcare, education, transport, communication, and personal care. Reflects changing lifestyle and increasing service sector expenses.
• Housing – 10.07%
  Includes house rent, maintenance, and accommodation-related costs. Mainly reflects living expenses of urban households.
• Fuel and Light – 6.84%
  Includes LPG, petrol, diesel, electricity, and kerosene expenses. Prices are highly affected by global crude oil rates and government policies.
• Clothing and Footwear – 6.53%
  Covers expenditure on garments, textiles, and footwear. Reflects seasonal demand, fashion trends, and raw material price changes.
• Pan, Tobacco, and Intoxicants – 2.38%
  Includes tobacco products, pan, and alcoholic beverages. Helps track consumption-based price changes and taxation impact.

Difference Between CPI and Wholesale Price Index (WPI)

Consumer Price Index (CPI) and Wholesale Price Index (WPI) are two important indicators used to measure inflation in an economy. CPI measures price changes at the consumer level, while WPI tracks price changes at the wholesale or producer level.

Major Issues with CPI in India

• Food items have a 45.86% weight in CPI, making inflation highly sensitive to seasonal food price fluctuations. Changes in vegetable, cereal, and pulse prices can sharply affect overall inflation.
• CPI uses 2012 = 100 as the base year, which may not reflect current consumption trends. Rapid growth of digital services and modern goods is not fully captured.
• Price levels vary widely across states, cities, and rural areas. A single national CPI cannot fully represent regional cost-of-living differences.
• Nearly 80–85% of India’s workforce is in the informal sector, where price data is difficult to collect. This reduces the accuracy and coverage of CPI calculations.
• CPI data is collected from thousands of markets and released monthly. The collection and verification process sometimes causes delays in inflation reporting.
• CPI is based on sample price data instead of full market coverage. Sampling limitations and product quality differences can affect accuracy.

Measures Needed to Improve CPI

• Reduce excessive food weight (45.86%) to balance inflation measurement.
• Regularly update base year to reflect modern consumption patterns.
• Expand state and city-level CPI data for better regional analysis.
• Include real-time housing, education, healthcare, and service costs.
• Strengthen supply chains, storage, and logistics to control inflation shocks.
• Use GST, e-commerce, and digital price tracking for accurate data collection.
• Improve measurement of informal market price changes.
• Reduce seasonal price fluctuations through agricultural and market reforms.
• Enhance coordination between RBI and government ministries for better inflation control.

Frequently Asked Questions (FAQs) on CPI