CPI

The Consumer Price Index (CPI) is the most widely watched measure of the cost of living faced by ordinary households in a country. It tracks the percentage change over time in the prices of a representative "basket" of goods and services — food, housing, transport, healthcare, education and so on — that households typically purchase. Because it reflects the inflation actually experienced by consumers rather than producers, the CPI directly shapes perceptions of economic well-being, influences wage negotiations, governs the indexation of pensions and government bonds, and serves as the primary inflation target for central banks in many jurisdictions.

How the Index Is Constructed

The CPI is built in three steps. First, statisticians conduct periodic household expenditure surveys to identify what different categories of consumers actually buy and in what proportions; these proportions become "weights." In India, for instance, the weights used in CPI are drawn from the Household Consumption Expenditure Survey, with food and beverages carrying the largest weight in the combined rural and urban basket. Second, price collectors visit designated retail outlets and service providers each month to record prices for hundreds of specific items within each category. Third, the price data are aggregated using the Laspeyres formula, which holds the consumption basket fixed at the base-period quantities, so that the resulting number reflects pure price change rather than shifts in buying patterns.

The result is a single index number — typically expressed with a base year set to 100 — and a percentage change month-on-month or year-on-year. Core CPI, which strips out volatile components like food and energy, is published alongside the headline figure because central banks find it a cleaner signal of underlying inflation.

India's Multiple CPI Series

India is unusual in maintaining several parallel consumer price indices. CPI (Combined), CPI-IW (Industrial Workers), CPI-AL (Agricultural Labourers) and CPI-RL (Rural Labourers) each serve different purposes. CPI (Combined), launched by the Central Statistics Office in 2011 with base year 2012 = 100, is the official measure of retail inflation and is what the Reserve Bank of India formally targets. CPI-IW, compiled by the Labour Bureau and dating back to the 1950s, governs dearness allowance for central government employees and millions of industrial workers. The Labour Bureau also publishes CPI-AL and CPI-RL, which primarily support the fixation of minimum wages for agricultural and rural labourers under the Mahatma Gandhi National Rural Employment Guarantee Act and related schemes.

Policy Significance

The most consequential shift in India's inflation framework came in 2014, when the RBI formally adopted flexible inflation targeting, with CPI (Combined) as the anchor. The central government, in consultation with the RBI, set a consumer inflation target of 4 percent, with a tolerance band of plus or minus 2 percent, for the period 2016–2021; this was subsequently extended to 2025–26. Failure to keep CPI inflation within the band for three consecutive quarters requires the RBI to submit a written explanation to the government, giving the target real institutional teeth. Earlier, between 2008 and 2013, India officially tracked wholesale-price-based inflation through the Wholesale Price Index, but the proliferation of administered prices and the increasing service orientation of the economy made consumer prices a more credible signal.

Comparison with the Wholesale Price Index

The Wholesale Price Index (WPI), which tracks prices at the producer or wholesale level, captures inflationary pressures earlier in the supply chain — particularly in manufactured goods and raw materials. Many advanced economies have moved away from WPI because it poorly reflects the cost of living. India retained it for decades because of its usefulness in deflating national accounts, but its policy weight has diminished since 2014. Most economists now regard CPI as the more accurate barometer of household purchasing power and the more relevant variable for monetary policy decisions in India.