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# What is the Consumer Price Index (CPI)? How does it shape your finances?

Every day, we hear people lamenting the rising cost of living, complaining about “mehngai badh gayi hai” (prices have gone up). But let’s take a step back and dive into the data to understand what’s really happening behind the scenes.

Today, we’re taking a trip into the world of the Consumer Price Index (CPI) to uncover how it affects your everyday finances.

## What is CPI?

The Consumer Price Index (CPI) tracks how the prices of goods and services in a typical consumer’s shopping basket change over time. It specifically tracks what urban consumers pay for a basket of consumer goods and services.

The CPI basket includes over 200 items like food, clothing, housing, transportation, healthcare, and more.

## How is CPI calculated?

India uses 2012 as the base year to calculate CPI.

1. Data Collection: A team of diligent price collectors roam the urban landscape, noting the prices of items in the CPI basket.
2. Data Compilation: Once the price data is gathered, it is meticulously compiled and categorised. This stage involves sorting, organising, and creating a structured dataset, making it ready for the analytical phase.
3. Calculating the Index: This index is expressed as a percentage, reflecting how prices in a particular time compare to a selected base year.

The formula for calculating the CPI index is:

The CPI value is calculated by dividing the cost of a standard basket of goods and services in a given year by the cost of the same basket during the base year, then multiplied by 100 to obtain the final CPI figure.

## Why should you care about CPI?

• Inflation indicator

The CPI is one of the most reliable indicators of inflation. When the CPI rises over time, it signals that the cost of living is increasing.

• Impact on financial planning

Whether you’re managing a household budget or planning your investments, the CPI matters. A rising CPI implies that the money you saved a year ago might not have the same purchasing power today.

Employers often use the CPI as a reference point when determining salary adjustments. If the CPI is rising, it indicates that the cost of living has gone up.

• Investment insights

The CPI plays a role in shaping central bank policies, which can influence interest rates. When interest rates change, it impacts the cost of borrowing and investment returns.

## The CPI and government policies

### Data Collection

The National Statistical Office (NSO), part of the Ministry of Statistics and Programme Implementation (MoSPI), takes on the crucial role of collecting and compiling price data.

• Data Sources: The price data are sourced from 1114 urban markets and 1181 villages spanning all states and union territories.
• Field staff dedication: Trained field staff from the Field Operations Division of NSO personally visit these locations on a weekly basis to gather price data.
• Coverage: During September 2023, NSO’s data collection efforts were extensive, encompassing nearly 99.8% of villages and 98.3% of urban markets.
• Market-wise Reporting: The market-wise prices reported stood at 88.7% for rural areas and 92.0% for urban areas.

### Tailoring government policies

• Tax adjustments: Governments use CPI data to adjust tax brackets. As the cost of living increases, tax brackets may shift to prevent citizens from moving into higher tax brackets merely due to inflation. This protects the purchasing power of individuals.
• Social security benefits: Social security benefits, including pensions and welfare programs, may be linked to the CPI. When the CPI rises, these benefits may also increase to keep pace with the rising cost of living.
• Financial assistance: Various forms of financial assistance, including subsidies and grants, may be indexed to the CPI. When the CPI indicates an increase in living costs, this indexing ensures that the assistance provided remains relevant and effective.

The comprehensive approach taken by NSO and MoSPI in data collection ensures that the CPI accurately reflects the real-life experiences of consumers across India. This, in turn, guides government policies to protect citizens’ financial well-being in an ever-evolving economic landscape.

## CPI limitations

While the CPI is an essential tool, it’s not without its limitations. It doesn’t account for the fact that consumers can substitute one item for another when prices change. Additionally, it might not fully capture quality improvements in goods and services over time.

## Conclusion

The Consumer Price Index isn’t just an obscure financial statistic; it’s a practical tool that helps you navigate the financial landscape.

Understanding the CPI empowers you to make informed financial decisions, whether you’re budgeting for your family, planning for retirement, or investing for the future.

## FAQs

What is the current CPI rate?

The CPI rate in India as of November 2023 is 5.55%. Manipur has the highest CPI at 11.6% and Sikkim has the lowest CPI at 2.6%.

How is CPI calculated?

Consumer price index for a specific period = (Cost of the basket in the current period / Cost of the basket in base period) * 100

Is CPI and inflation the same thing?

CPI and inflation are not the same thing, but they are related to the economy and money value. While inflation is a scenario, CPI is an indicator. CPI is an indicator that shows the level of inflation in the country.

Who releases CPI in India?

The National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI), under the Government of India, release all-India and state-wise CPIs every month.

What is CFPI?

CFPI stands for Consumer Food Price Index. Conceptually, it is similar to CPI, but the index is specific to the price of food items. While CFPI covers only one category, CPI is a broader index covering over 200 categories.