What is Consumer Price Index ?
A measure used for estimation of price changes in a basket of goods and services in an economy is called Consumer Price Index.
It is a statistical estimate constructed using the prices of sample of representative items whose prices are collected periodically.
Where CPI are used ?
Measuring Retail Inflation in the economy by collecting the change in prices of most common goods and services used by consumers. Called market basket, CPI is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education.
In India, there are four consumer price index numbers, which are calculated, and these are as follows:
- CPI for Industrial Workers (IW)
- CPI for Agricultural Labourers (AL)
- CPI for Rural Labourers (RL) a
- CPI for Urban Non-Manual Employees (UNME).
Formula for CPI = Cost of Fixed Basket of Goods and Services in Current Year/ Cost of Goods and Services in Base Year * 100
Uses of CPI
- To serve as an economic indicator
- To adjust other economic indicator
- Provides cost of living adjustments
Limitations of CPI
- Not applicable to all population of groups
- Doesn’t produce official estimates for subgroups of population.
- Does not measure every aspect that affects the living standards
- Two areas cannot be compared
- Social and environmental factors are beyond the definitional scope of the index.
Limitations in measurement of CPI
- Sampling Error
- Non Sampling Error
- Doesn’t Include Energy cost
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