Consumer Price Index or CPI is a measure of average change of prices of the various essential consumer goods and services purchased by households over a period of time. It is calculated by periodically collecting the prices of sample items from sample locations. It plays an important role in all the financial decisions of banks and monetary policy related decisions of Central bank.
In order to calculate CPI, information on various prices and weighting the various components are required. Statistical data required to calculate CPI are:
Price Data– This data is collected from sample locations using sample of consumer goods and services over a period of time
Weighting Data– based on the estimates of the proportion of different types of expenditure in the total expenditure provided by families and individuals
How CPI data is used?
Economic Indicator: CPI is widely used as a measure of inflation as it provides information about price changes of the commodities over a period of time. Government and Central banks use CPI to make economic and monetary policy related decisions respectively.
Deflator of other economic series: CPI is used to determine the purchasing power of currency at different times. Purchasing power of currency decreases with increase in CPI and vice versa.
Adjust income eligibility: CPI is used to determine the wages, payments, taxes and charges etc and it helps to adjust the income eligibility and wages of workers.
Difference between CPI (Consumer Price Index) and PPI(Producer Price Index): Both indexes are used to calculate the change in price of goods and services. But the differences are:
CPI focuses on good and services bought for consumption while PPI includes goods and services purchased by producers and consumers.
CPI includes imports also while PPI doesn’t include imports
CPI includes sales and excise taxes paid by consumer while PPI doesn’t include sales and excise taxes
Sampling errors: CPI is based on a sample of goods and calculated index may be different if the actual records are considered of all the retail purchases.
Non sampling errors: These occur due to problems of price data collection, delays in collecting data etc.