By definition, “A comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy is called Consumer Price Index (CPI).”
Features of Consumer Price Index
- This statistical estimate is computed periodically (mainly monthly basis);
- Used to measure ‘Inflation’;
- The current prices or the market prices which are frequently changing are considered;
- Both ‘goods’ and ‘services’ are included;
- Measured by the National Statistical Office (NSO)
Importance of Consumer Price Index
- Provides an idea about the ‘cost of living’;
- Assess how the economy responds when faced with either ‘inflation’ or ‘deflation’;
- Assists on how to spend your money correctly;
- Influences a Consumer’s decisions.
Six Components of Consumer Price Index
On September 14, 2020, the Ministry of Statistics and Programme Implementation (MOSPI) took to twitter to state the six components based on which the required data is collected and featured every month.
The Components Combined (Rural & Urban) Provisional Weights of the All India Consumer Price Indices (for August 2020)
||Combined (Rural & Urban) Provisional Weights of the All India Consumer Price Indices (for August 2020)
|Food & Beverages
|Fuel & Lights
|Clothing & Footwear
|Pan Tobacco & Intoxicants
Note: – The above table has been extracted from MOSPI’s Official release on September 14, 2020. The base used for the calculation is 100, of the year, 2012.
- Food and Beverages- Comes under the basic necessity and have 12 sub-headings:-
a. Cereals and products; b. Meat and fish; c. Egg; d. Milk and products; e. Oils and fats; f. Fruits; g. Vegetables; h. Pulses and products; i. Sugar and confectionery; j. Spices; k. Non-alcoholic beverages; l. Prepared meals, snacks, sweets, etc.
- Pan, Tobacco and Intoxicants- As individuals continue to consume these items, despite strict warnings from the health authorities, these are not omitted while calculating the CPI;
- Clothing and Footwear- It is undeniable that today, people spend a whole lot in this area, thus making it a vital part calculation of CPI;
- Housing- Comes under the basic necessity; The growth rate of the construction industry across India jumped to 5.65 per cent between 2015 to 2020 from 2.95 per cent between 2010 to 2015;
- Fuel and Light- Transportation has become an indispensable bit in today’s fast-paced world. Also, with the increase in the number of houses built, led to the rise in the usage of electricity. So, these cannot be omitted from the ‘basket of goods or services’ for calculating consumer price index;
- Miscellaneous- The items not falling under the above five headings will come under the ‘Miscellaneous,’ which are:-
a. Household goods and services; d. Recreation and Amusement;
b. Health; e. Education;
c. Transport and Communication; f. Personal care and effects.
How are these factors arrived at?
- The collection of monthly Price data is from a selected number of urban markets (1,114) and villages (1,181) through personal visits conducted by the field staff of the Field Operations Division of NSO. For arriving at the above figures (for August 2020), the Price data was successfully collected from 1,074 urban markets and 1,135 villages;
- Priced data are received through web portals which are maintained by the National Informatics Centre;
- Final indices for the previous month and provisional indices for the current month are compiled by following what the NSO terms as ‘the bottom-up approach’ (aggregating from State level indices).
Effect of Pandemic on Six Components of Consumer Price Index
|Food and Beverages
Its consumption has reduced significantly coupled with the supply chains being disrupted.
Eating ‘inside home’ is inversely proportional to eating ‘outside home’.
|Pan, Tobacco and Intoxicants
||There was a massive outcry from the consumers of this particular sector. In April 2020, according to reliable reports, there was a sharp 200 per cent increase in calls, which might have led the Indian government to help them out. However, there was no much improvement after the ‘helpline’ offered by the government.
|Clothing and Footwear
||The Fashion industry was hit hard too. Thousands of India’s craftsmen are without work. Customers are hesitant to enter malls and shops to avoid contact with the virus. Online shopping gained momentum.
|Construction workers started migrating to their hometowns which rendered the people unemployed, thus slowing the pace of this industry. According to Mr. S. Sridharan, (Chairman at Confederation of Real Estate Developers Association of India [CREDAI]), there is only 30 to 35 per cent workforce in Tamil Nadu alone, besides some migrant workers, who have not gone back to their homes. The workers’ livelihoods are also affected due to lack of living.
|Fuel and Light
||When compared to the rest of the world, the electricity demand recovered faster. However, it was interrupted in the last two weeks of August 2020 due to the weather conditions across India. There have been significant declines in the ‘industrialized states’ (namely, Gujarat and Maharashtra).
Here, transportation was hit worst while the other criteria sustained considerably with the people adopting the ‘online’ way of approaching the subjects.
Depiction of CPI (for August 2020) in the form of Graphs (as tweeted by MOSPI)
- Year on year inflation, based on CPI and Consumer Food Price Index (CFPI)
- Month to month change, based on CPI and CFPI
According to the data released by MOSPI for August 2020, retail inflation growth softened to 6.69 per cent; worsening beyond the Reserve Bank of India’s (RBI) upper margin of 6 per cent. Mr Rahul Gupta, the Head of Research-Currency, Emkay Global Financial Services, said, “Despite unlocking phases, the supply-side disruption is surging the food and fuel prices. The inflation figure for the fifth month in a row remains above RBI’s medium-term target of 6 per cent, so RBI rate cut hopes remains low at least at the October policy.”
August month’s retail inflation of 6.69 per cent was lower when compared to the forecast of 6.85 per cent made by the analysts in a Reuters poll and of 9.73 per cent registered in July 2020. Upasna Bhardwaj, the Senior Economist at Kotak Mahindra Bank, went on to state that “While CPI inflation reading continues to remain uncomfortably elevated, it has started to trend lower providing some relief. However, several uncertainties remain ahead as the supply side disruptions continue to dominate the weaker demand-side pressures along with one-off idiosyncratic factors weighing on core inflation. Going ahead as inflation remains elevated in the near term, we see limited room for policy easing at least through the December policy.”
The next announcement regarding the Consumer Price Index data for the month of September 2020 will be released on October 12, 2020.
All this is to assist a consumer in arriving at better decisions. When investment decisions are to be taken, better options can be resorted by consulting certified experts.