Consumer Price Index Number
The consumer price index number is used to examine the average weight of a price related to a group of products and services consisting of food, transportation as well as medical care. It measures an average change within prices that the customer is supposed to pay for the basket of products and services. Development in customer price index number is used to approach price changes correlated to the cost of living. The customer index number is an important statistic that is used to identify periods of deflation and inflation. It is also called an economic indicator.
Consumer Price Index Number for Industrial Workers
Consumer price index number for industrial workers is created to measure over time changes in prices regarding a given box of goods and services. This is absorbed by a specified population, in this case, industrial workers. The consumer index number is collected for all the industrial workers living in 70 centres within the industrial importance of the country. These specific 70 centres were given to all the states in proportion to industrial development.
The indices of all the 70 centres are collected and released each month on the ground of weights acquired from working-class families. It is also on the ground of the expenditure survey organized between 1981 and 1982 and modern prices of the individual items which were taken away from 226 markets covered by 70 centres. Based on the 70 centres, the All-India Index is derived which is also a weighted average.
Alongside, the Labour Bureau also collects and sends indices of other six centres for meeting the requirements of individual index users. Besides presenting serial data, the publication also has various other information like inflation rates, all-India items, linking factors for new and old series, etc.
The Different Uses of Consumer Price Index Number:
The consumer price index number specifies the change in consumer price. Thus, it helps the government to formulate several policies concerning control of taxation, price, exports and import of all the commodities.
It is used to grant allowance and other propensities to the employees.
It is also used to evaluate the purchasing power associated with money.
It also compares changes regarding the coat of survival of various communities.
The index number is also used to deflate data on wages, living, cost and national income.
It also acts as an economic indicator like financial instruments and the cost of commodities.
Acts as a policy formulator for international, state and national levels.
Consumer price index number is also known as the Cost of living index. It is a theoretical index that measures the differences in the price of services and goods to allow them as a substitution with the other items as the price varies. The consumer price index measures changes in the price level of services and consumer goods purchased by the households. The consumer price index is mostly used in measuring inflation as well as a proxy of the effectiveness of the government’s policies.
Thus, to summarize, the consumer price index measures changes in:
Retail prices
Producers prices
Wholesale prices
Consumer Price Index Number in Statistics
The formula includes CPTt, Ct, and Co
Where:
CPTt = consumer price index in the current period
Ct = cost of the market basket in the current period
C0 = cost of the market basket in the base period
Important Index Numbers
Although there are a lot of index numbers, two of them are effectively important and used in various sections of society. They are – Wholesale Price Index (WPI) and Consumer Price Index (CPI).
Wholesale Price Index
WPI measures the temporary change in the wholesale price of commodities. The wholesale price index deals with the relative change in cost from the market’s perspective. It is an important index.
To calculate WPI, commodities should be classified into –
Primary articles
Fuel and power
Manufactured goods
Consumer Price Index
CPI measures change in price given by definite buyers for consuming services and goods. It is also called the cost of the living index because of a change in cost levels affecting the different patterns which alter the living cost. It depicts the change in the price level. It also helps the government to develop fiscal policy and taxation policies.
Did You Know?
Consumer Price Index is mainly used to measure proxy and inflation efficiency of the economic policy of the government.
The consumer index statistics cover the self-employed, professionals, retired, the poor, and unemployed population of the country. However, it omits rural or non-metro populations, armed forces, farm families and the ones serving in the prison and people in the mental hospitals.
The CPI measures average changes in cost over time which buyers pay for baskets of services and goods.
CPI-W measures CPI for the Clerical Workers and Urban Wage Earners and CPI-U means CPI for Urban customers.
FAQs on Key Index Numbers and Their Importance
1. What is an index number in Economics, and what are its key characteristics?
An index number is a statistical method used to measure the relative change in a group of related variables, such as price or quantity, over a period of time. It essentially simplifies complex data into a single figure for easy comparison.
Its main characteristics are:
- Relative Measurement: They measure changes in percentage terms, not in absolute values, making it easier to compare different series.
- Specialised Averages: They are a form of average designed to measure changes in variables that cannot be directly added together.
- Basis for Comparison: They provide a common reference point, usually a base year with a value of 100, against which changes can be evaluated.
- Quantitative Expression: They express changes in a variable or a group of variables in a single, easy-to-understand number.
2. What are the main types of index numbers used in India to measure economic activity?
In India, the two most important and widely used index numbers are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
- Consumer Price Index (CPI): This measures the average change in retail prices of a basket of goods and services consumed by households. It is a key indicator of the cost of living and is used to measure retail inflation.
- Wholesale Price Index (WPI): This tracks the change in prices of goods sold and traded in bulk by wholesale businesses. It measures inflation at the producer or wholesale level before the goods reach the consumer.
Another significant index is the Index of Industrial Production (IIP), which measures the growth rates in different industry groups of the economy.
3. What is the fundamental difference between the Wholesale Price Index (WPI) and the Consumer Price Index (CPI)?
The fundamental difference between WPI and CPI lies in what they measure and at which stage of the economy.
- Stage of Transaction: WPI measures inflation at the wholesale level (producer to retailer), while CPI measures inflation at the retail level (retailer to consumer).
- Items Included: WPI tracks only goods, such as manufactured products and raw materials. In contrast, CPI tracks both goods and services, including education, healthcare, and transportation, which are a major part of consumer expenses.
- Purpose: WPI is often used to understand inflation trends in the broader economy and industry. CPI is a more accurate reflection of the cost of living and the impact of price changes on household budgets.
4. Why is a 'base year' so important when calculating an index number?
A base year is crucial because it acts as a stable and reliable benchmark for comparison. The index number for the base year is always set to 100. Any subsequent changes are measured relative to this value. For example, if the index is 115 in a later year, it signifies a 15% increase in the variable (e.g., price) compared to the base year. The choice of a base year is important; it must be a period of relative economic stability, free from major events like droughts, wars, or financial crises that could make prices abnormally high or low and thus distort all future comparisons.
5. How does the Consumer Price Index (CPI) directly impact a common person's salary and savings?
The Consumer Price Index (CPI) has a direct and significant impact on a person's financial life:
- Impact on Salary: Many employers, especially the central and state governments, use CPI data to calculate Dearness Allowance (DA). When CPI rises, it indicates inflation, and DA is increased to help employees cope with the higher cost of living, thereby protecting the real value of their salaries.
- Impact on Savings: Inflation, as measured by CPI, erodes the purchasing power of money. If the interest rate on your savings is lower than the inflation rate, the real value of your money is actually decreasing. Therefore, CPI helps you understand whether your savings are truly growing.
6. Why does the government need to calculate different CPIs for various groups like industrial workers and agricultural labourers?
The government calculates different CPIs, such as CPI for Industrial Workers (CPI-IW) and CPI for Agricultural Labourers (CPI-AL), because different population groups have vastly different consumption patterns. The 'basket of goods and services' that an urban industrial worker buys is not the same as what a rural agricultural labourer consumes. For instance, food items may have a much higher weightage in the CPI-AL, while housing, education, and transport might be more significant in the CPI-IW. Using separate indices ensures that policies, particularly wage adjustments, are based on data that accurately reflects the cost-of-living changes for that specific demographic group.
7. In what ways are index numbers important for government policy-making?
Index numbers are vital tools that guide government policy in several key areas:
- Monetary Policy Formulation: The Reserve Bank of India (RBI) closely monitors the CPI to manage inflation and make decisions on interest rates.
- Fiscal Policy Adjustments: The government uses price indices to frame policies related to taxes, trade, and subsidies to control prices and manage the economy.
- Wage and Allowance Determination: Index numbers like the CPI-IW are used as a basis for revising wages, salaries, and pensions to adjust for changes in the cost of living.
- Measuring Real Economic Growth: They are used to 'deflate' national income, converting nominal GDP (at current prices) to real GDP (at constant prices) to get a true picture of economic growth.
8. What are some of the key limitations to consider when using index numbers for economic analysis?
While useful, index numbers have several limitations that must be considered for accurate analysis:
- Not Fully Representative: The selected 'basket of goods' may not accurately reflect the consumption patterns of all individuals or households, as habits vary by region, income, and taste.
- Difficulty in Weight Assignment: Assigning appropriate weights to different commodities is a complex task, and these weights can become outdated as consumption habits change.
- Ignores Quality Changes: Index numbers primarily measure price changes and often fail to account for improvements or deterioration in the quality of products over time.
- Limited Applicability: An index number gives a broad indication of change and may not be suitable for specific, localised purposes. For instance, a national index might not reflect the unique economic conditions of a particular city or state.
