Although inflation is an overused term in financial parlance, only a few identify that we generally refer to CPI-based inflation while using this term. Consumer Price Index (CPI) and Wholesale Price Index (WPI) are two indicators used to measure changing price levels for a basket of goods. Here, we try to understand the facts about CPI-based inflation (also referred to as Retail Inflation).
What is CPI-based inflation?
CPI-based inflation tracks the price levels of goods at a consumer level. It is used to calculate the change in price levels of goods and services consumed by the households. It makes an attempt to quantify the aggregate price levels for the consumers. Generally, to measure inflation, central banks (RBI for India) estimate the percentage increase in CPI from the previous year.
Why is CPI-based inflation used?
As an economic indicator, it not only calculates the price levels for consumer goods but is also a reflection of government policies that are responsible for changing price levels. CPI-based inflation gives people and governments a fair idea about changing prices in an economy and lets all stakeholders make an informed decision while doing their financial planning.
CPI also tells about the changing purchasing power of consumers.
Types of CPI-based inflation
CPI in agriculture: Used to revise minimum wages for people working in agriculture.
CPI for rural labour: Used for people working as labourers
CPI for industry workers: Used to calculate the price level for goods consumed by industrial workers.
How to calculate CPI?
CPI = (Price of the market basket in the current year / Price of the market basket in the base year) X 100