CONSUMER PRICE INDEX CPI is a current socio-economic indicator that needs to be constructed: to measure the changes over time

e in the general level of prices of consumption goods and services that the reference population acquire, use or pay for consumption. to provide one of the basic parameters needed for economic planning and policy formulations by Government as well as private organizations. to adjust the taxes, fines or fees levied by Government so as to maintain the burden upon the people paying taxes, fines, etc. constant in real terms. for obtaining constant-price estimates of consumption expenditure for national accounting. for indexation of wages and salaries in contracts of employment. This presumably avoids the need to renegotiate the contracts when prices rise. for indexation of prices in contracts for the supply of goods and services by firms. There are four CPIs compiled and released at national level on monthly basis. These are CPI for Industrial Workers (IW), CPI for Agricultural Labourers (AL), CPI for Rural Labourers (RL), and CPI for Urban Non-Manual Employees (UNME). While the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment, the fourth by the Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme Implementation. Four CPIs viz. CPI(IW), CPI(AL), CPI(RL) and CPI(UNME), compiled at national level, reflect the effect of price fluctuations of various goods and services consumed by specific segments of population in the country. These indices do not encompass all the segments of the population and therefore, do not reflect the true picture of the price behavior in the country as a whole. As such, there is a need to compile a CPI for entire urban and rural population of the country to measure the inflation in Indian economy based on CPI, and this exercise has since been initiated by CSO; the first such index will be released from 2010-11.

The Common Index Formulae Following three formulae can be used for computation of a price index: Laspeyres Formula Paasches Formula Fishers Formula

The common formula for the Consumer Price Index as defined would be Total cost of a fixed basket of goods in the current period ---------------------------------------------------------------- X 100 Total cost of the same basket in the base period

The fixed basket of goods and services would be determined on the basis of a family budget enquiry among the population group concerned. The family budget enquiry would yield information on the consumption pattern of the families belonging to the group for the period to which the survey data relate. In normal economic situations, the Laspeyres index shows an upward bias (in relation to the true cost of living index) with the passage of time while the Paasches index shows a downward bias. It is for this reason that Irving Fisher, a renowned econometrician, constructed an ideal index as the geometric mean of the Laspeyres and Paasches indices. Since the geometric mean lies in between the two and hence, it is the nearest to the true cost of living index.

The consumption groups adopted in the series of Consumer Price Index Numbers for Urban Non-Manual Employees [(CPI(UNME)] released at national level, are as follows:Food, Beverages and Tobacco Fuel and light Housing Clothing, Bedding and Footwear and Miscellaneous The above grouping is done based on the criterion of purpose of expenditure. Those items of expenditure which do not belong to any one of the groups mentioned from 1 to 4 above, are relegated to the last group viz. Miscellaneous which ultimately becomes a sort of residual group containing widely dissimilar items. This leads to the need for further sub-grouping of the items in the various groups to achieve greater homogeneity within the sub-groups as compared to the groups. In the series of *(CPI(UNME)+ released at national level, the groups Food, Beverages and Tobacco; Clothing, Bedding and Footwear and Miscellaneous have been further divided into sub-groups as follows:Group 1 Food, Beverages and Tobacco Cereals and cereals products Pulses and pulses products Oils and Fats Meat, Fish and Eggs Milk and milk products Condiments and Spices Vegetables Fruits Sugar, Honey etc. Non-alcoholic Beverages Prepared meals and refreshments Pan, Supari, Tobacco etc.

Group 2 Fuel and Light Group 3 Housing Group 4 Clothing, Bedding and Footwear Clothing and Bedding Footwear Group 5 Miscellaneous Medical care Education Recreation and Amusement Transport and Communication Personal care and effects Household requisites Others Selection of Base Year The well known criteria for the selection of base year are :- (i) a normal year i.e. a year in which there are no abnormalities in the level of production, trade and in the price level and price variations, (ii) a year for which reliable price data are available and (iii) a year as recent as possible, and comparable with other price index series released at national and state levels. The National Statistical Commission set up by the Government of India, recommended (in 2001) that base year of a CPI series should be revised once in every five years and not later than ten years. As per International Labour Organisations (ILO) recommendation, the family living survey or household consumer expenditure survey needs be conducted at intervals generally of not more than 10 years with a view to updating the series of price index numbers.

The Producer Price Index (PPI) measures the average change in selling prices received by domestic producers for their output. The PPI measures price change from the perspective of the seller.

Wholesale Price Index In a dynamic world, prices do not remain constant. Inflation rate calculated on the basis of the movement of the Wholesale Price Index (WPI) is an important measure to monitor the dynamic movement of prices. As WPI captures price movements in a most comprehensive way, it is widely used by Government, banks, industry and business circles. Important monetary and fiscal policy changes are often linked to WPI movements. Similarly, the movement of WPI serves as an important determinant, in formulation of trade, fiscal and other economic policies by the Government of India. The WPI indices are also used for the purpose of escalation clauses in the supply of raw materials, machinery and construction work. WPI of the new series [with base year 2004- 05] was launched on 14th September, 2010. A representative commodity basket comprising 676 items has been selected and weighting diagram has been derived for the new series consistent with the structure of the economy. The number of quotations selected for collecting price data for the above items is 5482.