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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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