Consumer Price Index- What does it measures

PRICE STATISTICS Price statistics includes collection of retail and whole sale prices and computation of following indices:1. Consumer price index (C.P.I)2. Wholesale price index (W.P.I)3. Sensitive price indicator (S.P.I)Price Index=a normalized average of prices for a given class of goods or services in a given region, during a given interval of timemain measure of price changes at the retail levelmeasures changes in the cost of buying a representative fixed basket of goods and services generally accepted as a measure of inflation in the countryConsumer Price Index(CPI)WHOLE SALE PRICE INDEX (WPI) .designed to measure the change of price in the primary and wholesale markets

SENSITIVE PRICE INDICATOR (SPI)

designed to assess price movement of essential consumer items at short intervals (on weekly basis ).Why Three Types of Indices?CPI measures Inflation rate in the countrySPI is computed to assess the price movement of essential commodities at short interval of time to review the price situation in the country.WPI measures the General Price level in the whole sale market. =used most widely as measure of inflation =viewed as an indicator of the effectiveness of government economic policy=provides information about price changes in the Nation's economy to government, business, labor, and private citizens =guides the president, senate & congress in making economic decisions=shows trends in the CPI to aid informulating fiscal and monetary policies.Functions of CPIWhat does CPI measure?It measures Price changes of fixed market basket of goods and services of constant quality and quantity.It tells how much cost of living has risen or fallen due to price changes irrespective of changes in consumer behavior or quality of goods.It does not reflect the cost of living or in house hold consumption expenditure as such but only the influence of price fluctuation on the trend. FORMULA USED FOR CPI Laspeyre's formula as given below is being used for the computation of CPI. (Pn/Po) x wi In = --------------------- x 100 wi Where: In = CPI for the nth period Pn = price of an item in the in the nth period Po = price of an item in the base period wi = weight of the ith item in the base period = Po x qo / Po x Qo wi = Total weight of all items.

EXAMPLE FOR COMPUTATION OF CPIITEM

UNIT

BASE PRICE (Po)

PRICE IN MAR, 06 (Pn)

WEIGHT (Wi)

Pn / Po

Po / Pn x Wi

Moong Pulse

Kg

29.91

47.61

0.2230

1.5918

0.3550

Mash Pulse

Kg

45.01

52.72

0.2017

1.1713

0.2363

Masoor Pulse

Kg

36.23

44.03

0.2214

1.2153

0.2691

Gram Pulse

Kg

28.99

31.50

0.4272

1.0866

0.4642

1.0733

1.3246

( Pn/Po) x WiIndex = -------------------------------- x 100 Wi 1.3246I = -------------------------- x 100 = 123.41 1.0733

Limitations of CPICoverage is limited.Only covers urban areas.Prices may have different trend in rural & urban areas.Rent is computed through construction input items index instead of rent survey.It measures partially inflation not total consumers expenditure.Inflation Rate Definition In mainstream economics, the word inflation refers to a general rise in prices measured against a standard level of purchasing power. Previously the term was used to refer to an increase in the money supply, which is now referred to as expansionary monetary policy or monetary inflation. Inflation is measured by comparing two sets of goods at two points in time, and computing the increase in cost not reflected by an increase in quality. There are, therefore, many measures of inflation depending on the specific circumstances.