OFFICIAL STATISTICS SPECIALLY DESIGNED FOR INDIAN STATISTICAL SERVICE (ISS) AND OTHER GOVERNMENT & PRIVATE SECTOR STATISTICAL EXAMINATIONS
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Every time the news says "retail inflation rose to 5%," a statistician somewhere has done a lot of careful work. That number comes from the Consumer Price Index (CPI), one of the most tested topics in the Indian Statistical Service (ISS) exam, and one that also appears in RBI, SEBI, NABARD, SSC and university statistics papers. This guide gives you the concept, the methodology and three exam-style questions.
1. What is the Consumer Price Index?
The CPI measures the change over time in the prices of a fixed basket of goods and services that households buy for consumption. If the basket that cost 100 in the base year costs 118 today, the CPI is 118 and prices have risen 18% over that period.
Why examiners love this topic
CPI connects index number theory, survey sampling, national accounts and policy in one place. It is used for the RBI's inflation targeting, for Dearness Allowance and for deflating economic series, so questions can be theoretical, numerical or applied.
2. Who compiles CPI in India and how?
The National Statistics Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) compiles and releases CPI (Combined) every month, along with separate rural and urban indices. The current headline series uses 2012 as the base year. Weights come from the household Consumer Expenditure Survey of 2011-12, and prices are collected from sample villages and urban markets across the country.
Basket
About 299 items, grouped into six major groups, from food to education and health.
Weights
Derived from household consumption expenditure shares, so heavier spending means heavier weight.
Price data
Collected by field staff from a sample of rural villages and urban markets every month.
Exam tip
MoSPI has been working on a revised series with a newer base year. Before your exam, check the latest press release on the MoSPI website, because "current base year" questions depend on the date of the paper.
3. The Laspeyres formula behind CPI
CPI is a Laspeyres-type index: quantities (or expenditure weights) are fixed at the base period, and only prices change.
Here p0 and p1 are base-year and current prices, and q0 is the base-year quantity. In practice, statisticians use the weighted average of price relatives, which gives the same idea with weights taken from expenditure shares.
- Strength: simple, and needs quantity data for one period only.
- Weakness: tends to overstate inflation because it ignores consumers switching to cheaper goods (substitution bias).
- Property to remember: it does not satisfy the time reversal or factor reversal tests. Fisher's ideal index does.
4. CPI (Combined) weights at a glance
Notice how much weight food carries. This is why a vegetable price spike can move headline inflation so sharply.
Weights are for the 2012 base series (total = 100). Verify against the latest MoSPI release before quoting.
5. CPI vs WPI: the comparison that keeps coming up
| Basis | CPI | WPI |
|---|---|---|
| Measures | Retail prices paid by consumers | Wholesale prices of goods traded in bulk |
| Compiled by | NSO, MoSPI | Office of the Economic Adviser, DPIIT |
| Includes services | Yes (health, education, transport, etc.) | No, goods only |
| Main use | Inflation targeting, Dearness Allowance | Tracking producer and trade price trends |
| Base year | 2012 (current headline series) | 2011-12 |
6. Common mistakes students make
- Writing that CPI covers only urban areas. CPI (Combined) covers rural and urban India.
- Mixing up who compiles CPI and WPI, since the two agencies are different.
- Forgetting that Laspeyres uses base-year quantities, and Paasche uses current-year quantities.
- Ignoring the role of the base-year revision when comparing old and new inflation numbers.
7. Three important questions on CPI
Try each one on your own first, then tap the answer.
The Consumer Price Index in India is constructed using which type of index formula, and why is it said to suffer from substitution bias?
Show answer
CPI is a Laspeyres-type index because it uses base-year quantity (expenditure) weights. Consumers usually shift towards goods whose relative prices fall, but the fixed base-year basket cannot reflect this shift. So it gives too much weight to items that became relatively costlier, and tends to overstate the true rise in cost of living.
For three items, base-year prices are 10, 20, 40 and base-year quantities are 5, 3, 2. Current prices are 12, 25, 42. Compute the Laspeyres price index.
Show answer
Σp1q0 = (12×5) + (25×3) + (42×2) = 60 + 75 + 84 = 219
Σp0q0 = (10×5) + (20×3) + (40×2) = 50 + 60 + 80 = 190
Laspeyres index = (219 / 190) × 100 = 115.26, so prices rose about 15.3% over the base year.
Distinguish between CPI and WPI in India. Which one is better suited for inflation targeting and for wage indexation, and why?
Show answer
Write your answer in four parts. (a) Coverage: CPI measures retail prices of goods and services faced by households, while WPI covers only goods at the wholesale stage. (b) Agency: NSO (MoSPI) compiles CPI, and the Office of the Economic Adviser (DPIIT) compiles WPI. (c) Weights: CPI weights come from household consumption expenditure, WPI weights from the value of goods traded. (d) Use: CPI reflects the actual burden on consumers, so it is the anchor for the RBI's inflation targeting and for Dearness Allowance; WPI is better as an indicator of input and producer price pressure. Conclude that CPI is the more suitable measure for both purposes.
Key takeaways
- CPI tracks the cost of a fixed consumer basket, compiled monthly by NSO, MoSPI.
- It follows the Laspeyres approach, with expenditure weights from a base-year survey.
- Food carries the largest weight, so food prices drive headline inflation.
- Know CPI vs WPI cold. It appears in one form or another almost every year.
Everything on Official Statistics, in one book
CPI is just one chapter of the syllabus. If you want the complete picture, this book is built for you.
- Indian official statistical system: MoSPI, NSO, NSC and the data they produce
- National accounts, GDP, IIP, price indices and labour statistics
- NSS surveys, sampling designs and data quality concepts
- Written specially for the ISS exam, and useful for other government and private sector statistical exams
- Concept-focused notes to revise quickly before the exam
Official Statistics for ISS and other Government & Private Sector Statistical Examinations