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Consumer Price Index UPSC NOTE

 


What is Consumer Price Index?

  • In India, inflation is primarily measured by CPI (Consumer Price Index), which measure retail-level price changes.

  • CPI measures the inflation at retail level.

  • Consumer Price Index (CPI) is a measure of change in retail prices of goods and services consumed by people in a given area with reference to a base year. 

  • CPI is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education, etc. 

  • The price data is collected periodically, and thus, the CPI is used to calculate the inflation levels in an economy.

  • It is released by the National Statistical Office (NSO).

  • Four types of CPI: CPI for Industrial Workers (IW), CPI for Agricultural Labourer (AL), CPI for Rural Labourer (RL), CPI (Rural/Urban/Combined).

  • First three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the NSO in the Ministry of Statistics and Programme Implementation.

Challenges in calculation of inflation using CPI

  • Some items have a minimal weight in the overall CPI calculation, we are clinging onto the past, tracking items that no longer hold the same relevance in our consumption patterns.

  • The real consumption basket of a common Indian is fluid and continually evolving, mirroring the shifts in societal needs, preferences, and economic conditions. 

  • As time progresses, consumption patterns of individuals and households inevitably change. 

  • Technological advancements introduce new products and services.

  • In the current CPI (base year 2012), weights of various groups are as follows: 

    • food and beverages (45.86); 

    • paan, tobacco and intoxicants (2.38); 

    • clothing and footwear (6.53); 

    • housing (10.07); 

    • fuel and light (6.84); 

    • miscellaneous (28.32). 

  • The weightage of food in the CPI basket has decreased from 60.9 (in 1960) to 57.0 (in 1982) and to 46.2 (in 2001). 

  • This gradual decline indicates that as the economy grows, the proportion of income spent on food decreases. 

  • This is a common trend known as Engel’s Law, which suggests that as income rises, the proportion of income spent on food falls, even if the absolute expenditure on food rises.

  • Over-reliance on food inflation today distinguishes Indian inflation from many other developed countries where the food weight is much smaller.

  • The startlingly high weight of 9.67 assigned to cereals in the current CPI is undoubtedly excessive

  • As nations undergo economic advancement and societal progress, a typical trajectory involves diversifying food intake and embracing a broader range of nutrient-rich options beyond cereals.

    • Diluting the relative expenditure on cereals.

    • Pradhan Mantri Garib Kalyan Yojana has substantially reduced cereal expenditure for a large segment of the populace.

  • It’s essential to comprehend the evolution of consumption patterns with growing economic prosperity.

  • The challenge lies in effectively reflecting these changes in our inflation metrics without access to up-to-date consumption expenditure data.

  • The creation of a new CPI based on this fresh Consumption Expenditure Survey (CES) data will consume several more months.

  • In a rapidly evolving digital economy, our data collection and inflation estimation methods must adapt and evolve in tandem to ensure they accurately reflect the realities of modern-day consumption and living.


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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Consumer Price Index UPSC NOTE
Consumer Price Index UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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