What is India’s CPI?

by Manshu on February 25, 2013

in Economy

CPI is Consumer Price Index, and is a globally used measure for inflation. India also uses CPI to measure inflation, but the WPI or the Wholesale Price Index is more widely watched.

India launched a new Consumer Price Index in February 2011, and Dr. Ajay Shah lists down 4 ways in which this is meaningfully different from the old CPI. 

  1. It is disaggregated at the rural and urban levels. The new overall all India CPI is a weighted average of the two. This is in contrast with the earlier CPIs which represented subsets of the population (industrial workers, agricultural labourers, rural labourers, etc.).
  2. The new series has better geographical as well as commodity coverage. The basket of consumer goods has risen from 25 to 250.
  3. The weights have been derived from the 61st round of the NSS consumer expenditure survey (2004-05).
  4. Data for the urban CPI will be collected from 310 towns (compared to 78 in the current CPI-IW, for all India). The rural CPI will use data from 1181 villages. Field officers of the NSSO and the Department of Post will be the price collection agents for urban and rural centers respectively.

The new index reported its highest ever inflation number for January 2013 when the provisional all India CPI came to 10.79%. This was higher than the 10.56% number for December 2012, and also higher than the WPI number that was reported earlier.

Let’s look at three things that help get a deeper understanding of CPI. The first one is CPI components, and the second one is how this measure is calculated, and finally how is this different from WPI.

Components of India’s CPI

The CPI is calculated for rural areas, and urban areas, and then a combined weight is used to determine the national average. Here are the constituents of CPI.

Sub group/group Rural Urban Combined
Cereals and products 19.08 8.73 14.59
Pulses and products 3.25 1.87 2.65
Milk and milk products 8.59 6.61 7.73
Oils and fats 4.67 2.89 3.9
Egg, fish and meat 3.38 2.26 2.89
Vegetables 6.57 3.96 5.44
Fruits 1.9 1.88 1.89
Sugar etc 2.41 1.26 1.91
Condiments and spices 2.13 1.16 1.71
Non- alcoholic beverages 2.04 2.02 2.03
Prepared meals etc 2.57 3.17 2.83
Pan, tobacco  and Intoxicants 2.73 1.35 2.13
Food, beverages and tobacco 59.31 37.15 49.71
Fuel and light 10.42 8.4 9.49
Clothing and bedding 4.6 3.34 4.05
Footwear 0.77 0.57 0.68
Clothing, bedding and footwear 5.36 3.91 4.73
Housing   22.53 9.77
Education 2.71 4.18 3.35
Medical care 6.72 4.34 5.69
Recreation and amusement 1 1.99 1.43
Transport and communication 5.83 9.84 7.57
Personal care and  effects 3.05 2.74 2.92
Household requisites 4.48 3.92 4.3
Others 1.12 0.99 1.06
Miscellaneous 24.91 28 26.31
Total 100 100 100.00

The most obvious thing about these components is how the weight for housing is zero in rural areas, but it’s a very high 22.53% in urban areas. If anyone has any insights as to why that is, please leave a comment.

How is CPI data collected?

Surveys are conducted to collect price data in urban and local areas. In the urban areas, 310 towns have been identified in the urban areas where the data is collected, and similarly there are 1,182 villages from where data is collected for rural areas. Interestingly, the post office workers are used to collect data in rural areas while employees of NSSO collect data in urban areas. So, this index is a result of survey done every month that helps establish the index values.

Difference between the WPI index and CPI Index

I did a post on the constituents of the WPI index a couple of years ago but I believe the constituents haven’t changed since then. Here are the components of the WPI index.

 

Primary Articles
Food Articles 15.4025
Non Food Articles 6.1381
Minerals 0.4847
Sub Total 22.0253
Fuel, Power, Light & Lubricants
Coal Mining 1.7529
Mineral Oils 6.9896
Electricity 5.4837
Sub Total 14.2262
Manufactured Products
Food Products 11.5378
Beverages, Tobacco and Tobacco Products 1.3391
Textiles 9.7999
Wood and Wood Products 0.1731
Paper and Paper Products 2.0440
Leather and Leather Products 1.0193
Rubber and Plastic Products 2.3882
Chemicals and Chemical Products 11.9312
Non-Metallic Mineral Products 2.5159
Machinery and Machine Tools 8.3633
Transport Equipment and Parts 4.2948
Basic Metals and Alloys 8.3419
Sub Total 63.7485
Grand Total 100.00
I think one of the first things you notice in this list is that there is no housing, which is rather ridiculous for widely watched index when you consider how much people in cities pay for housing either in the form or rent or even worse high prices and EMIs. (Read: Thoughts on an Indian Real Estate Bubble).
There is no section for services as well, as the WPI is simply broken down into primary articles, fuel power and manufactured products.
The WPI also undergoes frequent revisions and those aren’t small either, and as far as I know CPI hasn’t gone through such big revisions so far.
Conclusion
Looking at the constituents, and the way the data is collected for the CPI index tells you that you can’t really look at this index as the absolute truth, and it is better served as an indicator of magnitude as well as direction of inflation and you shouldn’t give much weight to the number in a given month but rather how the direction is moving and what the magnitude is. I also feel that the CPI is a much better indicator than the WPI because of the way it is structured and because it doesn’t suffer from the frequent revisions that the WPI does.
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{ 8 comments… read them below or add one }

ramamurthy February 25, 2013 at 3:01 pm

Good and educative as usual.
It is also good for each individual family to keep an account of regular monthly expenses and arrive at its own CPI.My family consists of self and wife,both senior citizens.We stay in Bangalore in our own house and have no liabilities and no dependents.

Reply

Manshu February 25, 2013 at 6:16 pm

Thank you.

I think you have brought up this point several times in earlier comments as well. And it should be obvious to anyone reading how their inflation will be different from yours if they rent a place or have kids that go to school.

Reply

I Mirza February 26, 2013 at 1:07 am

“Housing group has not been given any weightage in the rural areas CPI as its share is around 1% and it has been distributed to other groups on pro rata basis. CPI (Urban) has a weightage of 22.53% in respect of Housing group.”

source: http://pib.nic.in/newsite/erelease.aspx?relid=69636

Reply

Manshu March 4, 2013 at 5:19 am

Thanks!

Reply

Chetan Ambi February 26, 2013 at 7:06 am

Nice post!!. Always wondered how the inflation will be calculated and was never heard of CPI or WPI. Now everything is clear. Thanks a lot.

Reply

Bhavin February 28, 2013 at 8:52 am

Some thoughts:
1. Why should “pan tobacco and intoxicants” have a higher weight than say “fruits” or “sugar”?
2. In fact, why are items such as “pan, tobacco and intoxicants” there in the list at all?
3. Why does “transport and communication” for urban folk have such a high weight?

Reply

Manshu March 4, 2013 at 5:09 am

The idea is to give weight to those things in the proportion that people spend their income on. So that’s why these weights. If you remove pan, and people spend so much money on pan and tobacco, then your index won’t be accurate because it doesn’t cover one big thing that people spend their money on.

Reply

sandeep singh June 26, 2013 at 4:06 pm

Any plz tell me how to calculate consumer price index in india ..with example …required for inflation

Reply

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