Consumer Price Index

Also called: CPI, Cost of living index · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Class 11, Ch 7 "Index Numbers"; Class 12, Ch 2 "National Income Accounting"

Meaning

The Consumer Price Index (CPI) is a cost-of-living index. It uses retail prices (the prices people pay in shops) to show how much a fixed basket of goods and services, bought by a chosen group of consumers, costs now compared with what the same basket cost in a base year (the reference year, where the index = 100).

• CPI = (Cost of fixed basket in current year ÷ Cost of the same basket in base year) × 100
• CPI inflation (%) = (Iₜ − Iₜ₋₁₂) ÷ Iₜ₋₁₂ × 100. This is the year-on-year change: this month's index compared with the same month last year [2].

It matters because the CPI-Combined is India's measure of headline retail inflation. The RBI targets it. Other CPIs decide the Dearness Allowance of government employees and minimum wages.

Explanation

How the CPI is built

• Basket of commodities: a fixed, typical set of goods and services that the reference group usually buys.

• The basket includes imported goods that households consume, such as imported fuel or phones, because consumers pay for them.

• Weights: how much each item counts in the index. They come from household consumption expenditure surveys.

• An item that takes a bigger share of the family budget gets a bigger weight.

• Fixed quantities: the basket stays the same as in the base year. So the CPI is a Laspeyres-type index (an index that uses base-year quantities as weights).

• What it measures: whether a consumer can still buy the same basket, not what they actually bought. It measures changes in purchasing power.
• Reading a number: "CPI-IW (2001 = 100) is 277 in December 2014" means:
• A basket that cost ₹100 in 2001 cost ₹277 in December 2014.
• So the price of that basket rose 177%.

Worked examples (NCERT)

A. Simple aggregate method (Class 12) A consumer buys 90 kg of rice and 5 pieces of cloth.

Year	Rice	Cloth	Basket cost
2000 (base)	₹10/kg	₹100/piece	90×10 + 5×100 = ₹1,400
2005	₹15/kg	₹120/piece	90×15 + 5×120 = ₹1,950

• CPI (2005) = 1,950 ÷ 1,400 × 100 = 139.29. So the cost of living rose about 39.3%.

B. Family budget method (Class 11): CPI = ΣWR ÷ ΣW

• Price relative (R) = (p₁ ÷ p₀) × 100. It shows how one item's price moved. p₀ is the base-year price and p₁ is the current price.
• W = the item's share of the family budget.
• In NCERT's table (food, fuel, cloth, rent, misc.), ΣWR = 9,786.85 and ΣW = 100. So CPI = 97.86, which means the cost of living fell 2.14%.

• Watch for an NCERT printing slip: food's WR should be 35 × 96.67 = 3,383.45, not 3,883.45.

• Working back to a weight (Q18): CPI = 125, food index = 120, all other items = 135.

• 120w + 135(1 − w) = 125 → w = 2/3
• So food carries about 66.7% of the weight in a worker's basket.

C. Inflation from the index

• All-India CPI-Combined (2024=100) was 104.46 in January 2026 and 101.67 in January 2025 [3].
• (104.46 − 101.67) ÷ 101.67 × 100 ≈ 2.74%. The published figure is 2.75%, because MoSPI calculates from unrounded indices [3].

Official method and reference periods (CPI 2024 series)

• Two levels of calculation [2]:
• Jevons index (a geometric mean of price relatives) for elementary indices, meaning one item across many markets.

• Young / modified Laspeyres index for higher-level indices. This is the same weighted-average idea as ΣWR/ΣW.

• Three reference periods [2]:

• Index reference period (the period where the index = 100): 2024.
• Weight reference period (the survey that gives the weights): HCES 2023-24.
• Price reference period (when base prices were collected): calendar year 2024.

What makes the CPI rise or fall

• Retail price = wholesale price + traders' margin (plus transport and other costs). So the CPI can move differently from the WPI.
• Items with bigger weights move the index more.
• In the 2012 series, food had a weight of about 46.

• So price jumps in onion, tomato or pulses pushed headline CPI up sharply.

• Services such as health, education, transport and rent affect the CPI. They do not affect the WPI.

• Engel's law: as incomes rise, families spend a smaller share on food. So food's weight falls each time the index is rebased.

In India

The CPI family: who compiles what

Index	Compiler	Covers	Current base	Main use
CPI-IW	Labour Bureau	Industrial workers	2016=100, released in 2020 [4]	DA of government employees; industrial wages
CPI-AL	Labour Bureau	Agricultural labourers	2019=100, from the June 2025 index [6]	Minimum wages in agriculture
CPI-RL	Labour Bureau	Rural labourers (farm and non-farm)	2019=100, from the June 2025 index [6]	Rural minimum wages
CPI-Rural / Urban / Combined	NSO (MoSPI)	All rural / urban households	2024=100, first released 12 February 2026 [3]	Headline retail inflation; RBI's target
CPI-UNME	CSO (formerly)	Urban non-manual employees	Discontinued	Replaced by CPI-Urban

• CPI-IW uses prices from 317 markets in 88 industrially important centres [5].

• Its linking factor (the number that converts the new series into old-series terms) is 2.88 [4]. This keeps DA calculations continuous across the base change.

• The new CPI 2024 series (NSO)

• Coverage: 1,465 rural markets and 1,395 urban markets in 434 towns. It also covers 12 online markets in towns with population above 25 lakh, where prices are collected weekly [2].
• Administrative data is used for rail fares, fuel prices (PPAC), postal charges and TRAI mobile data. Airfares and OTT subscriptions are priced online [2].
• Classification: it follows COICOP 2018 (the UN's Classification of Individual Consumption According to Purpose), so India's CPI can be compared with other countries. It has 12 divisions, 43 groups, 92 classes and 162 sub-classes [2][3].
• Basket: weighted items rose from 299 → 358, with services going from 40 → 50 [2].
• Rural housing is included for the first time [2].
• Food and beverages weight in CPI-C: 45.86 (2012) → 40.10 (2024) in the old 6-group structure, and 36.75 under COICOP [2].
• Free social transfers (for example, free ration grain) are excluded. Only what households pay for is counted [2].

• MoSPI plans to rebase every 3–5 years, depending on when new HCES data is available [2].

• Latest figure (January 2026): CPI-C inflation 2.75%, Rural 2.73%, Urban 2.77%. Food inflation (CFPI) was 2.13% [3].

• Law behind it: under Section 45ZA of the RBI Act, 1934, the Central Government, in consultation with the RBI, sets the inflation target in terms of the CPI once every five years. The target is 4% ± 2% [7].
• The RBI has failed if average inflation stays above 6% or below 2% for three consecutive quarters [7].

Don't confuse with

• Wholesale Price Index (WPI): uses wholesale prices (bulk trade between producers and traders) and has no services. The CPI uses retail prices and includes services. The RBI targets the CPI, not the WPI.
• GDP deflator: covers only goods and services produced in India, and its basket changes every year. The CPI includes imported goods that consumers buy and uses a fixed basket with fixed weights.
• Consumer Food Price Index (CFPI): a food-only index compiled by the NSO. It leaves out non-alcoholic beverages and prepared meals, snacks and sweets. The CPI covers the whole consumption basket.
• Headline vs core inflation: headline inflation is the change in the full CPI-Combined, including food and fuel. Core inflation leaves food and fuel out. India's official target is headline CPI [7].

Prelims Hooks

• Compilers: CPI-IW, CPI-AL and CPI-RL → Labour Bureau. CPI-Rural, CPI-Urban, CPI-Combined and CFPI → NSO (MoSPI). A common trap is to swap them.
• Bases: CPI-IW 2016=100 (linking factor 2.88) [4]. CPI-AL/RL 2019=100 from June 2025 [6]. CPI-R/U/C 2024=100, first released 12 February 2026, with weights from HCES 2023-24 [3].
• Target: the Central Government, in consultation with the RBI, sets 4% ± 2% CPI-C inflation under Section 45ZA of the RBI Act, 1934 [7]. The RBI does not set the target alone.
• Formulas: NCERT family budget method CPI = ΣWR/ΣW. Official method: Jevons at the elementary level and Young/modified Laspeyres at higher levels [2].
• CPI-UNME has been discontinued and replaced by CPI-Urban. CPI-IW → DA. CPI-AL → agricultural minimum wages.
• CPI 2024 series: follows COICOP 2018, has 12 divisions and 358 items, includes rural housing for the first time, and excludes free PDS grain [2].

Mains Points

• Old bases distort policy (GS-III):
• With food at about 46% in the 2012 series, food supply shocks pushed headline inflation higher than today's spending justifies.
• Rebasing to 2024 lowers food's weight, adds services and rural housing, and brings in online prices [2][3].

• As a result, the RBI's target and the DA and wage links now track real household spending more closely.

• Headline vs core targeting (GS-III, monetary policy):

• Raising the repo rate (the rate at which the RBI lends to banks) cannot bring down food prices that rise because of poor harvests.
• But food prices shape households' inflation expectations (what people think prices will do next), so dropping food from the target is risky.

• The 4% ± 2% framework under Section 45ZA and the RBI's Discussion Paper of 21 August 2025 are at the centre of this debate [7][8].

• One CPI or many, and welfare measurement (GS-II):

• Group-specific CPIs make wage indexation fairer (CPI-IW for DA, CPI-AL/RL for rural wages). But different bases and compilers make the indices hard to compare. Rebasing every 3–5 years tied to HCES is the reform direction [2].
• Free PDS grain is excluded from the CPI [2]. So the CPI does not show the value of subsidies households receive in kind. This matters when the CPI is used to judge real wages, poverty lines or transfer schemes.

Related concepts

• Basket of commodities
• Retail prices
• CPI for Industrial Workers
• CPI for Agricultural Labourers
• CPI for Rural Labourers
• CPI for urban non-manual employees
• CPI-Rural and CPI-Urban
• CPI-Combined
• Consumer Food Price Index

Read more

• The consumer price index family in India