Dr. Anamika Shrivastava NCERT Economics · Class 11 & 12

Glossary term

Consumer Price Index (CPI): Meaning and Definition

Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated

The Consumer Price Index (CPI) measures the change over time in the retail prices of a basket of goods and services bought by households. It is a weighted average of group indices, with weights taken from household spending. It is the main measure of retail inflation and is used to adjust wages.

In more detail

The CPI follows the cost of a fixed basket bought by households, with weights taken from a spending survey. It is used to adjust wages and allowances and to measure inflation. Because spending patterns change, the basket and base year are revised from time to time.

Example

With group weights of 45, 10, 12, 20 and 13 and indices of 130, 115, 108, 120 and 125, the CPI is 12,321 ÷ 100 = 123.21.

Key points

  • CPI = ΣWI ÷ ΣW.
  • Includes services as well as goods.
  • Used for dearness allowance and inflation targeting.

Common mistake

Treating the CPI as the price of every household’s own spending. It is an average basket.

Wholesale Price IndexIndex number

Where it is explained

This term is explained in Class 11 Statistics Chapter 7: Index Numbers.