What are the Different Types of CPI in India and their Functions?

The Consumer Price Index (CPI) helps determine retail inflation in an economy by considering the changes in the price of common goods and services. CPI intends to measure the increase in the prices of several household items over time. These changes adversely affect the purchasing capacity of the currency in an economy. In general, Consumer Price Index (CPI) has been classified into four different types. Keep reading to learn more about the types of CPI in India and many other aspects regarding this index.

In India, Consumer Price Index (CPI) is categorised into four different types as per their features and nature of work as stated below:

1. CPI for Industrial Workers (CPI-IW)

The Consumer Price Index for Industrial Workers (CPI-IW) determines the change in the price of fixed baskets of consumer products and services used by workers of Industries.

CPI-IW comprises selected services and is determined based on retail prices. Hence, it helps to determine the dearness allowance of workers in private and public companies. As per the current updates, the All-India Consumer Price Index for Industrial Workers (CPI-IW) for February 2023 has decreased by 0.1 points and presently stands at 132.7.

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

Among the different types of CPI in India, CPI for Urban Non-Manual Employees (CPI-UNME) is noteworthy. The CPI for agricultural labourers and industrial workers are produced by the Labour Bureau. The Central Statistical Organisation is responsible for publishing the CPI number of urban non-manual employees. This is necessary since their typical consumption baskets comprise several dissimilar items. However, the CPI-UNME became inactive in April 2008, according to the declaration of the National Statistical Commission.

3. CPI for Agricultural Labourers (CPI-AL)

The Labour Bureau produces the CPI for industrial workers and agricultural labourers (CPI-AL). Here the data is reviewed to determine the minimum wages for labourers in the farming sector across various states. As per the latest updates of January 2023, the All-India CPI Number for Agricultural Labourers increased by 3 points and now stands at 1171 points.

4. CPI for Rural Labourers (CPI-RL)

Labour Bureau is responsible for establishing the CPI-AL. Generally, the CPI for agricultural labourers and industrial workers is published by Labour Bureau. According to the current updates of January 2023, the All-India CPI Number for Rural Labourers has increased by 2 points and currently stands at 1181 points.

After knowing about the types of Consumer Price Indexes, look at how to calculate inflation in an economy using CPI.

The changes in the inflation rate influence the prices of general goods and services and reduce the purchasing power of money. Inflation is calculated with the help of the Consumer Price Index (CPI). CPI helps determine inflation by calculating the rate of price changes of a fixed basket of goods and services over a given period.

CPI = (Cost of Fixed Basket of Products and Services in Existing Year/ Cost of Fixed Basket of Products and Services in Base Year) X 100.

Note that you can only use this formula to find the inflation rate after you know the CPI for the current and base years.

After knowing how inflation is calculated by using CPI, check out some of its noteworthy uses.

The rate of inflation can be calculated by using the GDP deflator. It measures the changes in the price of goods and services. To get the GDP deflator, you need to calculate the ratio of nominal to real GDP. In other words, the GDP deflator is computed as nominal GDP divided by real GDP and multiplied by 100.

The formula to determine inflation using the GDP deflator is given below:

GDP Price Deflator = (Nominal GDP / Real GDP) × 100

As you can see, this formula helps you figure out the inflation rate in terms of GDP. Here, the changes in consumption level and the introduction of new and existing products and services are incorporated. It contrasts the fixed basket of goods and services measured in the inflation calculation through CPI. As a result, the inflation rate measured by the GDP deflator accurately exhibits how economic power has changed over a determined period.

Some of the notable uses of the Consumer Price Index (CPI) include:

• Consumer Price Index (CPI) is a significant indicator of inflation in a country's economy.
• CPI can be used to change the components of national income.
• Consumer Price Index (CPI) is a current economic and social indicator which aims to determine the change in consumer prices down the line.
• Consumer Price Index (CPI) is used to measure the purchasing power of money. This purchasing power of money is actually the reciprocal of a consumer price index.
• CPI is also used to determine the 'real wages' using deflation, wherein Real wages = (Nominal wages / CPI in the base year) X CPI in the current year.
• The Consumer Price Index (CPI) enables the government to know whether any change in monetary policy is required.

Besides the advantages, Consumer Price Index (CPI) has some limitations.

Mentioned below are the common limitations of the Consumer Price Index (CPI):

• Consumer Price Index is sometimes inapplicable to every population group.
• Generally, CPI is a conditional cost-of-living metric, which does not measure every aspect affecting the living standards.
• Environmental and social factors are away from the definitional scope of the index.
• Consumer Price Index (CPI) does not furnish official estimates for a smaller population group.
• In CPI, there is always a chance of sampling error since the chosen sample may not precisely represent the total population of a given region.
• CPI is prone to non-sampling errors, which comprise price-data collection errors and operational implementation errors.
• One of the major criticisms of CPI is that it does not consider energy costs, although it is a key expense in most households.

You should have developed an idea about different types of CPI in India from the above discussion. By calculating these Consumer Price Indices (CPIs), the government can make prudent economic decisions. If the inflation rate is higher than normal, it can take necessary measures so that economic activities run properly.