CPI
Also written Consumer Price Index
An index tracking the retail-level prices of a defined basket of goods and services over time — the standard measure of the inflation actually felt by consumers.
In plain language
Prices can be measured at different points in the supply chain. CPI measures them at the point a household actually pays: retail level.
It is one of two standard inflation gauges the workbook names. The other, the Wholesale Price Index, measures the same idea earlier in the chain, at the wholesale level — and the two can move by different amounts in the same period.
How it works
The workbook: "Generally, inflation is measured in two ways - at wholesale level in terms of Wholesale Price Index (WPI) and retail level in terms of Consumer Price Index (CPI). Typically, economists define a basket of products based on general consumption in the economy and compute its prices based on wholesale prices and retail prices, defining WPI and CPI respectively."
Statistics on CPI and WPI, tracked over several years, feed directly into policy decisions by both the government and the central bank — they are the primary evidence base for whether inflation is running hot or cold.
A worked example
A household's typical monthly basket — rice, dal, vegetables, cooking fuel, a portion of rent — costs Rs 18,000 in a base year. A year later, the identical basket costs Rs 19,260.
(19,260 − 18,000) ÷ 18,000 × 100 = 7% CPI inflation
If, over the same period, the wholesale prices of the same goods (before retail margins, transport and taxes) rose only 4%, the gap between the two — 7% at retail versus 4% at wholesale — shows up because distribution and retail costs widened over the year, on top of the underlying wholesale price rise.
Why NISM asks about it
Chapter 5.3.3 introduces CPI alongside WPI as the two standard inflation measures. Expect a question distinguishing what each index measures — retail versus wholesale — and their shared role in feeding fiscal and monetary policy decisions.
Common exam traps
- CPI and WPI are computed on different baskets at different points in the chain and can show different inflation rates in the same period — do not assume they move together or by the same magnitude.
Check yourself
1.Inflation measured at the wholesale level and at the retail level is captured respectively by:
- a)CPI and WPI
- b)WPI and CPI
- c)CPI and GDP deflator
- d)WPI and PPI
Show the answer
Answer: (b) WPI and CPI
The workbook: "generally, inflation is measured in two ways — at wholesale level in terms of Wholesale Price Index (WPI) and retail level in terms of Consumer Price Index (CPI)."
Option A simply reverses them, which is the single most common error on this topic — remember that C in CPI stands for Consumer, and the consumer buys at retail.
The GDP deflator is not discussed in this chapter at all, and PPI (producer price index) is not a term the workbook uses.
2.Which inflation index is used for Inflation Indexed Bonds, and which for the Inflation-Indexed National Saving Securities-Cumulative 2013?
- a)CPI for both
- b)WPI for IIBs and CPI for the IINSS-C
- c)CPI for IIBs and WPI for the IINSS-C
- d)WPI for both
Show the answer
Answer: (b) WPI for IIBs and CPI for the IINSS-C
For IIBs: the Wholesale Price Index (WPI) is the inflation measure that is considered for the calculation of the index ratio for these bonds.
For the retail instrument: the bond carries a fixed interest of 1.5% and an inflation rate calculated on the basis of the Consumer Price Index (CPI).
The two using different indices is exactly the kind of detail a 25%-negative-marking paper builds a question on.
How the IIB adjustment works: these bonds have a fixed real coupon rate which is applied to the inflation adjusted principal on each interest payment date. On maturity, the higher of the face value or inflation adjusted principal is paid out to the investors. The inflation adjustment to the principal is done by multiplying it with the index ratio, which is calculated by dividing the reference index on the settlement date by the reference index on the date of issue.
The IINSS-C features: these bonds of 10-year tenor were available to retail resident individuals, minors, HUFs, and charities among others. The interest is compounded every six months and cumulated and the same is payable with the principal on maturity. The fixed rate of interest is the floor and is payable even if there is deflation.
Why such bonds exist at all: debt instruments, being fixed income products, run the risk of delivering negative real returns during high inflation periods.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Cost-push inflationA rise in the general price level caused by higher input costs to producers — wages, raw materials, energy — rather than by demand outrunning supply.
- Demand-pull inflationInflation caused by demand running ahead of the supply available to meet it — too much money chasing too few goods.
- InflationA sustained general rise in the price level, which erodes what a rupee buys — and the reason a nominal return has to be deflated before it means anything.