What Is CPI Inflation and How it Effects?

cpi inflation

Consumer price index or CPI is a metric used to evaluate inflation. CPI specifically measures retail inflation by gathering information on the costs of services and goods that are used by a nation's retail population. The term CPI inflation describes an increase in the average price of a certain amount of goods and services over a specific time frame. Continue reading this guide to know what is CPI and everything related to it.

What Does CPI Mean?

Consumer Price Index, or CPI, tracks changes in the cost of a selection of consumer goods and services that households purchase. The CPI is a numerical estimate created by using a collection of items whose prices are routinely gathered. In this context, one should have several pointers about CPI:

  • CPI measures changes in consumer price levels.
  • Wholesale Price Index tracks changes in pricing at the producer level (WPI).
  • WPI cannot account for changes in service pricing, whereas CPI can.

Candidates should be aware that WPI and CPI are not the same things.

What Are the Different Types of CPI?

Now that you know what CPI is, let us take a look at the types of CPI. There are four types of CPI, namely:

1. CPI-IW (CPI for Industrial Workers)

The Labour Bureau compiles information for this type of CPI. It aims to evaluate changes in a specified collection of goods and services used by industrial workers over time. A typical working-class family from the following seven economic sectors, including factories, mines, plantations, motor transport, ports, railways, and power generation and distribution, would be the target group.

2. CPI-AL (CPI for Agricultural Labourers)

The Labour Bureau gathers this information to update the minimum salaries for agricultural work in various states and union territories.

3. CPI-RL (CPI for Rural Labourers)

The Labour Bureau is responsible for compiling the information for this type.

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

This information is compiled by Central Statistics Office (CSO), which is now the National Statistical Office (NSO). The Ministry of Statistics and Program Implementation oversees CSO.

What Are the Different Categories of CPI?

Eight categories make up the CPI. These categories are as follows: 

  • Education
  • Communication
  • Transportation
  • Leisure
  • Attire
  • Food and Drink
  • Housing
  • Medical Care

The National Statistical Office (NSO), under the Ministry of Statistics and Program Implementation, publishes the CPI.

How Is CPI Used?

1. Connection Between CPI and Repo Rates

As the RBI oversees our nation's monetary policies, CPI is a crucial tool. The RBI's framework requires it to maintain an inflation rate of about 4%. The main goal of the RBI is to contain inflation; however, this goal may occasionally alter, depending on the monetary policy committee's decision. 

Say that the economy's inflation rate is increasing. This indicates that the market's overall price level is increasing. In this case, the central bank will want to decrease the money available to the economy to curb inflation. Consequently, the RBI may raise repo rates, making it more challenging for financial institutions to borrow money from RBI and, eventually, decreasing the amount of liquidity in the economy.

2. Connection Between Inflation and Investment

It is crucial to determine inflation-adjusted returns since they reveal an investment's true value and whether or not the money has increased in value in real terms. If over time, your investment produces annual returns of 3% while the price of goods increases by 3.5%, the net result is that your investment's returns are zero. This happens due to the increase in money's worth.

What Is the Current CPI Inflation Rate in India?

The current CPI rate in India has gone up to 6.50% in January, 2023. Consumer price index (CPI) retail inflation in the nation decreased to a 1-year low of 5.72% in December 2022 from 5.88% in November 2022. WPI had decreased from 8.39% in October to 5.85% in November 2022, a 21-month low. CPI is down 4.84% when compared to inflation from ten years ago, or in December 2012.

What do the Critiques Have to Say About CPI in India?

Because it is based on a fixed basket of products, the CPI does not provide an entirely accurate measure of the cost of living, despite being a convenient approach to calculate the relative price level over time and cost of living. The bias against substitution, the introduction of several new products, and quality variations are three issues with the CPI:

1. Substitution bias

The substitution bias is one of the main flaws in CPI. Prices for products and services do not all increase or decrease by the same amount over a year. The amount of certain goods consumers buy varies according to how much they pay for each item in the basket. However, because the basket is predetermined, the CPI does not take into account consumers' preferences for goods with modest price increases from year to year.

2. Introduction of several new items

The addition of new goods is the second issue with the CPI. New things gradually make their way into the typical consumer's basket of goods and services. However, because the CPI only considers a set basket of products, a new good cannot be taken into account.

3. Quality changes

The third issue with the CPI is how poorly it handles variations in goods and services. The desirability and value of an item in a fixed basket of products used to calculate the CPI fluctuate when the quality of the item rises or falls.

CPI would not alter from one year to the next to reflect this adjustment. If inflation is increasing, it means that the same amount of ₹ 100 would be able to purchase fewer products tomorrow than today. Over time, the worth of money has increased, and this is a general economic function. Even though this is a more basic definition of inflation, consumers regularly see a price rise while purchasing vegetables, using an IT company's services, or even investing in mutual funds or stocks. 

Anyone from any profession, including investors, traders, consumers, businesspeople, farmers, and so on, should know what is CPI and can use its measures. CPI establishes the basis for all transactions since it determines the worth of money.

Frequently Asked Questions about CPI Inflation

How is a CPI sample made?

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Through a procedure known as initiation, an item enters the CPI sample. A CPI data collector is usually in charge of conducting this process.

Are CPI and inflation the same thing?

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Prices often increase over time, but they can also decrease (deflation). The Consumer Price Index (CPI), which calculates the percentage change in the cost of a selection of products and services that families typically use, is the most well-known measure of inflation.

What happens if CPI is high?

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CPI measures one of the biggest hazards to a strong economy: inflation. If your salary does not keep up with rising costs, inflation lowers your living standards because your cost of living rises over time. High inflation can be detrimental to the economy.

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