What is Consumer Price Index?

The Consumer Price Index (CPI) is a number that measures how much prices have changed over time. It tells us whether things are getting more expensive or cheaper compared to a specific year called the base year.

If groceries cost Rs 1,000 last year and the same groceries now cost Rs 1,100, prices went up by 10%. CPI captures exactly this idea, but for the entire economy.

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$\text{CPI} = \dfrac{\text{Cost of a fixed basket of goods in the current year}}{\text{Cost of the same basket in the base year}} \times 100$

A basket of goods is a pre-decided list of items (food, clothing, fuel, etc.) and their quantities that a typical consumer buys. The base year is a reference year chosen for comparison, and its CPI is always $100$.

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Item	Quantity	Base Year Price	Current Year Price
Wheat	90 kg	Rs 10/kg	Rs 15/kg
Cloth	5 pcs	Rs 100/pc	Rs 120/pc

Cost of the basket in the base year:

$(90 \times 10) + (5 \times 100) = 900 + 500 = \text{Rs } 1400$

Cost of the basket in the current year:

$(90 \times 15) + (5 \times 120) = 1350 + 600 = \text{Rs } 1950$

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$\text{CPI} = \dfrac{1950}{1400} \times 100$

$\text{CPI} = 1.3929 \times 100$

$\text{CPI} \approx 139.29$

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A CPI of $139.29$ means prices have risen by about $39.29\%$ compared to the base year.

If $\text{CPI} = 100$, prices are the same as the base year. If $\text{CPI} > 100$, prices have risen. If $\text{CPI} < 100$, prices have fallen.

Governments use CPI to measure inflation and to adjust salaries, pensions, and economic policies.