CONSUMER PRICE INDEX (CPI)

2. Consumer Price Index

• The Consumer Price Index (CPI) is a measure of the change in prices of a basket of goods and services that are commonly purchased by consumers. It is the most commonly used measure of inflation.
• The CPI is calculated by comparing the prices of the goods and services in the basket in a particular period to those of the same in a base period.
• The base period is usually the previous year's corresponding period. The difference in prices is expressed as a percentage, and this is the CPI inflation rate.
• The CPI is calculated for eight different categories of goods and services Food and beverages, Housing, Clothing and footwear, Transport, Health, Education, Communication, Recreation and Miscellaneous goods and services.
• The weights of each category in the CPI are determined by the expenditure patterns of urban households. For example, food and beverages have the highest weight in the CPI, followed by housing and transport.
• The CPI inflation rate is an important indicator of the cost of living.
• It is used by the government to set monetary policy and by businesses to make pricing decisions.

3. Wholesale Price Index

• The Wholesale Price Index (WPI) is a measure of the change in prices of goods and services at the wholesale level.
• It is calculated by comparing the prices of a basket of goods and services in a particular period to those of the same in a base period.
• The base period is usually the previous year's corresponding period. The difference in prices is expressed as a percentage, and this is the WPI inflation rate.
• The WPI is calculated for 67 groups of commodities, which are further divided into 225 subgroups.
• The weights of each group and subgroup in the WPI are determined by the value of the goods and services produced in each group and subgroup.
• The WPI inflation rate is an important indicator of inflation at the wholesale level.
• It is used by businesses to make pricing decisions and by the government to set monetary policy.

4. Findings of the Report

4.1. Food inflation

• Food inflation in India remained high in August, at 9.94%. This was driven by rising prices of essential food items, such as cereals, pulses, vegetables, and oils.
• Eleven of the 12 items on the heavyweight food and beverages group of the CPI logged price increases, with oils and fats, the sole item logging a year-on-year decline in prices, posting its first sequential increase in nine months.
• Vegetables provided some relief, with tomatoes leading an appreciable month-on-month deflation of 5.88% in the 19-member basket.
• However, the cooking staples of potatoes and onions were among the seven items that continued to log sequential inflation (2.3% and 12.3%, respectively).

4.2. Monsoon deficit and rising crude oil prices

• The near-term inflation outlook is also made more uncertain by other factors, including a distinct deficit in monsoon rainfall.
• Besides the overall 10% shortfall, sharp regional and temporal anomalies in rain distribution have impacted either the sowing or the quality of produce of several farm items.
• Kharif's sowing of pulses had, as of September 8, recorded an 8.6% shortfall compared with the year-earlier period.
• Another inflation driver, crude oil, has also seen a steady rise in prices as the output cuts by major oil producers of the OPEC+ grouping start to bite.
• The price of India's crude basket had, as of September 12, climbed 7.2% from the average in August to $92.65/barrel, according to official data.

• For the RBI, the latest inflation data further roils its interest rate calculus.
• Unless CPI inflation decelerates by an incredible 250 basis points in September to a 4.33% pace, price gains are certain to substantially overshoot the monetary authority's 6.2% forecast for the July-September quarter, leaving it with few real options to achieve its medium-term price stability goal of 4% inflation.
• As the RBI has been at pains to stress, failure to anchor inflation expectations risks hurting growth.

5. About the sticky Consumer Price Index (CPI)

• The sticky Consumer Price Index (CPI) is a subset of the CPI that includes goods and services that change prices relatively infrequently.
• These goods and services are thought to incorporate expectations about future inflation to a greater degree than prices that change more frequently.
• Some of the items included in the sticky CPI are Rent, Housing costs, Utilities, Education, Healthcare, Transportation, Household furnishings and appliances, Personal insurance, Recreation, and Miscellaneous goods and services. 
• The sticky CPI is often used by economists to measure inflation expectations.
• This is because prices of sticky goods and services are less likely to be affected by short-term changes in supply and demand, and are therefore more likely to reflect changes in inflation expectations.
• The sticky CPI is also used by central banks to set monetary policy.
• This is because the central bank wants to make sure that inflation expectations are anchored at a low level.
• If inflation expectations start to rise, the central bank may raise interest rates to bring them back down.

6. How India’s retail inflation is measured?

• India's retail inflation is measured by the Consumer Price Index (CPI), a basket of goods and services commonly purchased by urban households.
• The CPI is calculated by the National Statistical Office (NSO) every month.
• The CPI is calculated by comparing the prices of the goods and services in the basket in a particular month to those of the same in a base month.
• The base month is usually the previous year's corresponding month. The difference in prices is expressed as a percentage, and this is the CPI inflation rate.
• The CPI is calculated for eight different categories of goods and services, Food and beverages, Housing, Clothing and footwear, Transport, Health, Education, Communication, Recreation and Miscellaneous goods and services.
• The weights of each category in the CPI are determined by the expenditure patterns of urban households. For example, food and beverages have the highest weight in the CPI, followed by housing and transport.
• The CPI inflation rate is an important indicator of the cost of living in India.
• It is used by the government to set monetary policy and by businesses to make pricing decisions.

7. Calculation of Inflation

• Inflation is the rate at which the prices of goods and services increase over time.
• It is calculated by comparing the prices of a basket of goods and services in a particular period to the prices of the same basket of goods and services in a base period.
• The base period is usually the previous year's corresponding period. The difference in prices is expressed as a percentage, and this is the inflation rate.

There are two main ways to calculate inflation

The PPI is calculated by the following formula:

PPI = (Cost of a basket of goods and services at the wholesale level in the current period / Cost of a basket of goods and services at the wholesale level in the base period) * 100