Q.Explain the difficulties in Construction of consumer price index number.

Consumer Price Index Segmentation

Let’s start with something you already know. Suppose you and your friend each go to the market with ₹100. You buy rice, dal, and vegetables. Your friend buys a new phone case, a movie ticket, and a packet of chips. After a year, you both go back with ₹100 again. You find you can buy less rice and dal than before. Your friend finds the phone case costs the same, but the movie ticket is pricier. Who is “feeling” inflation more?

The answer depends on what each of you actually buys. That’s the core idea behind Consumer Price Index (CPI) segmentation.

The everyday intuition

Inflation is not a single number that hits everyone equally. A price index like CPI measures the average change in prices of a fixed basket of goods and services. But “average” hides a lot. Different groups of people — urban vs rural, rich vs poor, employed vs retired — consume very different things. If the price of pulses rises sharply, it hurts a low-income household much more than a high-income one, because pulses form a larger share of the poor family’s spending. If the price of luxury cars rises, the rich feel it; the poor don’t even notice.

So, to get a meaningful picture of inflation for different sections of society, we segment the CPI — that is, we construct separate indices for different consumer groups.

The precise meaning

Consumer Price Index Segmentation is the practice of calculating separate CPIs for distinct population groups, each with its own consumption basket and weights, so that the inflation experienced by each group can be tracked independently.

In India, the official statistical agency (the Ministry of Statistics and Programme Implementation) publishes four main CPIs:

Each of these indices uses a different basket of goods and different weights (the share of total expenditure on each item). For example, food might have a weight of 50% in CPI-AL but only 35% in CPI-UNME. So when food prices rise, CPI-AL shoots up more than CPI-UNME.

Why it matters

First, policy targeting. If the government wants to control inflation that hurts the poor, it needs to know which prices are rising for the poor. CPI-AL tells them that. If they only looked at a single national CPI, they might miss a food-price spike that devastates rural labourers.

Second, wage and pension indexation. Many wages, dearness allowances, and pensions are linked to specific CPIs. Industrial workers’ dearness allowance is tied to CPI-IW. Agricultural labourers’ minimum wages are adjusted using CPI-AL. If you used the wrong index, the compensation would be unfair. …