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Understanding CPI and Its Impact on Inflation

CPI is used as the key measure of inflation in India to track price changes of goods and services over time. Previously WPI was used but it only reflects wholesale prices, whereas CPI focuses on retail consumer prices and the true cost of living. CPI is calculated monthly based on a fixed basket of commodities that represents the typical expenditures of households. High inflation leads the RBI to increase interest rates to control prices, while low inflation allows for decreased rates.

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197 views8 pages

Understanding CPI and Its Impact on Inflation

CPI is used as the key measure of inflation in India to track price changes of goods and services over time. Previously WPI was used but it only reflects wholesale prices, whereas CPI focuses on retail consumer prices and the true cost of living. CPI is calculated monthly based on a fixed basket of commodities that represents the typical expenditures of households. High inflation leads the RBI to increase interest rates to control prices, while low inflation allows for decreased rates.

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What is CPI?

• CPI is designed to measure the changes over time in general level of retail prices
of selected goods and services

• CPI numbers are widely used as macroeconomic indicator of inflation

• CPI is used as a tool by government and central banks for targeting inflation and
monitoring price stability

• CPI is considered as one of the most important economic indicators


Why RBI adopted CPI as the key measure of
Inflation?

• Earlier RBI was using Wholesale Price Index (WPI) as the key measure of Inflation

• WPI reflects the inflation pertaining to the change in the average price of the goods that
are transacted in the wholesale market

• CPI takes into account the change in the average retail price of goods and services over a
period of time.

• CPI focuses on the change in the cost of living at the consumer’s end, whereas the WPI
focuses on the inflation of the economy in the whole.
How CPI is Measured in India?

• CPI is calculated on monthly basis and is released every month at 5.30 p.m. on
12th day of the following month.

• The CPI measures price changes by comparing, through time, the cost of a
fixed basket of commodities.

• The basket is based on the expenditures of a target population in a certain


reference period. Since the basket contains commodities of unchanging or
equivalent quantity and quality, the index reflects only pure price.
Method of Computation

Consumer Price Index = Current Period Price of the basket * 100


Previous Period Price of the basket
Measurement of Basket
Views on Inflation

Going forward we expect Inflation to move further upward.Major factors that


affect Inflation are as follows :

• Rise in oil prices

• Rise in government expenditure

• Expected increase in medical expenses

• Increase in consumer spending

• Depreciation of Indian rupee


How Inflation affects RBI Interest rate decisions?
• High Inflation - Increase in interest rates

• Low Inflation - Decrease in interest rates

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