Consumer Price Index (CPI), sometimes referred to as headline inflation is the measure that calculates the average fluctuation in the prices of goods and services available in the market.
CPI only includes the products which are used by the consumer for his basic needs. It does not include the raw materials, or any other intermediate goods utilised in factories and firms.
Fluctuations in CPI are used to examine the change in the price of the items and then directly associate it with the cost of living of the people. It closely relates the inflation and the purchasing power of the society.
Inflation is measured by calculating the annual percentage change in a CPI.
Consumer Price Index not only measures the inflation but also analysis the price movements, market trends, and determines the economic policy of the country.
Method of Calculation of Consumer Price Index
The methods used for the calculation of the CPI are different in different countries. Each national statistical institute make use of a different method in the calculation of the data.
Generally the CPI is calculated by considering the change in the price of each item in the predetermined basket of goods and then taking out an average of it. The is the simplest method that can be used in the calculation of CPI
Significance of Consumer Price Index
As stated above, CPI is used to measure the inflation in an economy.
The rise in the value of Consumer Price Index indicates that the inflation in the country is rising and the purchasing power of its people is decreasing as the higher the price of the commodities the more difficult people will find to purchase them.
On the contrary, if there is a fall in the value of CPI and the index reaches zero, the economy is said to be going through the phase of deflation.
This is a situation where the prices of the commodities fall unlike in inflation but the consumers are still hesitant to purchase them in an apprehension that the price will fall further next day.
Consumer Price Index in India
In India, Consumer Price Index CPI is presented by the Ministry of Statistics and Programme Implementation (MOSPI).
On January 2016, CPI in India has increased to 126.30 Index Points which was 126.10 Index Points in December 2015. It was highest in November 2015, reaching an all time high of 126.60 Index Points and was lowest in February 2011 at 86.81 Index Points.
Benefits of Consumer Price Index for a Country
The Consumer Price Index helps the government to decide a fiscal policy.
It helps the central bank to decide whether it should ease the money supply or raise interest rates.
