How the Inflation would be calculated using CPI in India ?

How the Inflation would be calculated using CPI in India ?


 

Consumer Price Index (CPI) is an economic measurement to finding the Inflation Rate. It also used to analyze the weighted average of price changes of a collection of particular goods and services. The Goods and services are likely Food, Transportation, Clothing, Education, Medical or any other goods or services. So, the calculation for CPI  is nothing but by taking the price changes in every item on the collection of goods and services and then average the total price changes, then divided by the base year.

How the CPI can be calculated ?


Already we know that there is a price for every item in a collection of goods and services and the collection should be averaged. The term, ‘Collection’ often referred as a ‘Basket’. For example, if the Toned Milk priced at Rs. 45 per litre and 100 gram of butter at a price of Rs. 45 in the month of January 2018 and the total consumption is 2 litres of milk and 100 gm of butter. Then the basket price would be Rs. 135/- (2 X 45/- per litre + 1 X 45/- per 100 gm).

Generally, the Consumer price index is calculated from the base year. The base year is provided by the World Bank from the Source of International Monetary Fund and defined the base year for CPI is 2010 = 100 (Base). Even though the Central Statistical Office (CSO) changed the Consumer price index with base year 2012 = 100. So, the base year is now 2012 = 100. (Base year is a starting year to compute the price)




 



CPI – Consumer Price Index, BPP – Basket Price for a Period, BYP – Base year Price

 

Kindly note that we are taking the basket price only on Milk and Butter as example, but several household things are there.  The basket price for the month of January 2018 is Rs. 135/- and the Base year price is at Rs. 100/- . Finally, the CPI for January is 135, for milk and butter. If the milk priced at Rs. 42/- in the month of January 2017, then the CPI was at Rs. 129 /- (Basket Price = Rs. 129/-). So, we know that the CPI was increased from January 2017 to January 2018.

Consumer Price Index (CPI) is very useful to identify the Inflation or Deflation, where the index helps to find the cost of living on Individual Households by every category. CPI in India can be broadly classified into 25 or more categories and specially designed for Urban, Rural and Combined (Urban + Rural) households.

CPI Index Category:



  • Cereals and Products

  • Meat and Fish

  • Egg

  • Milk and Products

  • Oils and Fats

  • Fruits

  • Vegetables

  • Pulses and Products

  • Sugar and Confectionery

  • Spices

  • Non-alcoholic beverages

  • Prepared Meals, Snacks and Sweets, etc

  • Food and Beverages

  • Pan, Tobacco and intoxicants

  • Clothing

  • Footwear

  • Housing

  • Fuel and Light

  • Household Goods and services

  • Health

  • Transport and Communication

  • Recreation and amusement

  • Education

  • Personal Care and effects, Miscellaneous


 

Calculating Inflation rate using CPI:


Earlier in India, the inflation rate was computed by the Wholesale Price Index (WPI). After 2010, the RBI has changed the index for Inflation to New Consumer Price Index (CPI). As of now, the inflation rate in India would be calculated by CPI.



 



From the above example, We had two periods of CPI - Rs. 129/- and Rs. 135/- for the month of January 2017 and January 2018 respectively. Here we have to take the current period (i.e. Jan 2018) as CPI 1 and the preceding period as CPI 2.

The Inflation rate for January 2018 is, [ ( 6 / 129 ) X 100 ]  = 4.65 %

In Generally, the Inflation rate would be calculated on MoM (Month on Month) or  YoY (Year on Year) i.e. Preceding Period. Here-now, we will take the real value of Consumer Price Index in India.

CPI for the Month of August 2018 -   Rs. 140.40

CPI for the Month of August 2017 -   Rs. 135.40  (Preceding period)

Now, the Inflation rate for the August 2018 -  [ (5/135.4) X 100 ] =  3.69 % (Percent)

 

Hence, Consumer Price Index is an important one to analyze the price changes on real value over Demand and Supply. It used to find the Inflation rate as accurate, but the index includes a certain categories in a basket. Though a Good one.

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