What Is CPI Inflation and How it Effects?

Consumer Price Index, or CPI, tracks changes in the cost of a selection of consumer goods and services that households purchase. The CPI is a numerical estimate created by using a collection of items whose prices are routinely gathered. In this context, one should have several pointers about CPI:

• CPI measures changes in consumer price levels.
• Wholesale Price Index tracks changes in pricing at the producer level (WPI).
• WPI cannot account for changes in service pricing, whereas CPI can.

Candidates should be aware that WPI and CPI are not the same things.

1. CPI-IW (CPI for Industrial Workers)

2. CPI-AL (CPI for Agricultural Labourers)

3. CPI-RL (CPI for Rural Labourers)

4. CPI-UNME (CPI for Urban Non-Manual Employees)

Eight categories make up the CPI. These categories are as follows: 

• Education
• Communication
• Transportation
• Leisure
• Attire
• Food and Drink
• Housing
• Medical Care

The National Statistical Office (NSO), under the Ministry of Statistics and Program Implementation, publishes the CPI.

1. Connection Between CPI and Repo Rates

As the RBI oversees our nation's monetary policies, CPI is a crucial tool. The RBI's framework requires it to maintain an inflation rate of about 4%. The main goal of the RBI is to contain inflation; however, this goal may occasionally alter, depending on the monetary policy committee's decision. 

Say that the economy's inflation rate is increasing. This indicates that the market's overall price level is increasing. In this case, the central bank will want to decrease the money available to the economy to curb inflation. Consequently, the RBI may raise repo rates, making it more challenging for financial institutions to borrow money from RBI and, eventually, decreasing the amount of liquidity in the economy.

2. Connection Between Inflation and Investment

1. Substitution bias

2. Introduction of several new items

3. Quality changes

The third issue with the CPI is how poorly it handles variations in goods and services. The desirability and value of an item in a fixed basket of products used to calculate the CPI fluctuate when the quality of the item rises or falls.

CPI would not alter from one year to the next to reflect this adjustment. If inflation is increasing, it means that the same amount of ₹ 100 would be able to purchase fewer products tomorrow than today. Over time, the worth of money has increased, and this is a general economic function. Even though this is a more basic definition of inflation, consumers regularly see a price rise while purchasing vegetables, using an IT company's services, or even investing in mutual funds or stocks. 

Anyone from any profession, including investors, traders, consumers, businesspeople, farmers, and so on, should know what is CPI and can use its measures. CPI establishes the basis for all transactions since it determines the worth of money.