BharatNotes
Consumer Price Index (CPI)
/kənˈsjuːmər praɪs ˈɪndɛks/A statistical measure compiled by the NSO that tracks the average change in prices paid by households for a fixed basket of consumer goods and services over time, with the current base year of 2012 = 100. CPI (Combined) — covering both urban and rural areas — is used by the RBI for inflation targeting under the Flexible Inflation Targeting (FIT) framework adopted in 2016, with a target of 4% (+/- 2%). Other variants include CPI-IW (Industrial Workers, base 2016 — used for DA calculation), CPI-AL (Agricultural Labourers), and CPI-RL (Rural Labourers). Unlike the WPI, CPI includes services and reflects the actual cost of living experienced by consumers.
Context & Background
India shifted from WPI to CPI as the primary inflation indicator based on the Urjit Patel Committee (2014) recommendation, recognising that CPI better captures the inflation experienced by households. The FIT framework (amended RBI Act, 2016) mandates the Monetary Policy Committee (MPC) to maintain CPI inflation at 4% (tolerance band 2%-6%). If inflation exceeds 6% or falls below 2% for three consecutive quarters, the MPC must write an explanatory letter to the Government. CPI food and beverages (about 46% weight) is the most volatile component and the largest driver of headline inflation fluctuations in India.
UPSC Exam Relevance
GS3 Economy — Prelims: CPI base year 2012, compiled by NSO, CPI (Combined) used for inflation targeting, variants (CPI-IW/AL/RL/Urban/Rural), WPI does not include services while CPI does, Urjit Patel Committee; Mains: why India shifted from WPI to CPI for monetary policy, food inflation's disproportionate impact on the poor (food is ~46% of CPI basket), headline vs core inflation debate, CPI limitations (fixed basket, quality adjustment issues), divergence between CPI and WPI trends and its implications.
