Q.Bring out two methods of constructing consumer price index (CPI).
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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:
| CPI Segment | Coverage | What it tracks |
|---|---|---|
| CPI for Industrial Workers (CPI-IW) | Factory workers, miners, plantation workers | Their typical consumption (food, fuel, housing, clothing, etc.) |
| CPI for Agricultural Labourers (CPI-AL) | Landless agricultural labourers | Rural, low-income consumption (heavy weight on food) |
| CPI for Rural Labourers (CPI-RL) | All rural labourers (agricultural + non-agricultural) | Similar to CPI-AL but broader |
| CPI for Urban Non-Manual Employees (CPI-UNME) | Urban salaried and professional workers | Urban, higher-income consumption (more weight on housing, transport, education) |
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.
Segmentation is not a formula — it is a method. There is no single equation for “segmentation.” Instead, each segment’s CPI is calculated using the standard Laspeyres price index formula:
CPIt=∑(P0×Q0)∑(Pt×Q0)×100
where Pt = current year price, P0 = base year price, and Q0 = base year quantity (the fixed basket). The segmentation lies in choosing a different Q0 for each group.
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. …
CPI can be built up either by aggregating weighted expenditure directly, or by averaging weighted price relatives. …
CPI is constructed either by the Aggregate Expenditure Method or the Family Budget Method.
Two methods of constructing the Consumer Price Index (CPI):
- Aggregate Expenditure Method (Weighted Aggregative Method): The total expenditure on a fixed 'basket' of commodities (quantities consumed in the base year) is computed at both current-year and base-year prices, and CPI is obtained as: CPI = (Σp₁q₀ / Σp₀q₀) × 100. …
- CBSE 2026Set MARCH6 marksQ.Explain the difficulties in Construction of consumer price index number.
›Reveal solutionSolution
Constructing a CPI is difficult because of problems in choosing the base year, selecting a representative basket, collecting reliable prices, assigning correct weights, choosing the right average/formula, and accounting for changing tastes and differences among regions and income groups.
In the Index Numbers chapter of Karnataka 1st PUC Statistics for Economics, the construction of a Consumer Price Index number faces the following difficulties:
- Selection of the base year — the base year must be a normal year (free of war, famine, boom or slump). Choosing such a year, and one that is not too far in the past, is difficult.
- Selection of representative commodities (the basket) — the goods and services chosen must reflect the actual consumption of the group covered. Selecting a basket that stays representative over time is hard, especially as habits change.
- Collection of reliable price data — prices differ across shops, markets and time; obtaining accurate and comparable retail prices from the right places is difficult and prices may be misreported.
- Assigning weights — different items have different importance in a family's budget, so correct weights must be given. Deciding fair and up-to-date weights is a major problem.
- Choice of an average / formula — several averages (mean, median) and index formulae exist, and each may give a different result; selecting the most suitable one is not easy. …
- CBSE 2024Set MARCH6 marksQ.Write a short note on CPI, WPI and IIP.
›Reveal solutionSolution
CPI tracks retail prices (cost of living), WPI tracks wholesale prices (general inflation), and IIP tracks the volume of industrial production.
In the Karnataka 1st PUC Statistics for Economics chapter on Index Numbers, three important indices are studied:
1. CPI — Consumer Price Index (Cost of Living Index):
- It measures the change in the retail prices of a fixed basket of goods and services (food, clothing, fuel, rent, etc.) commonly consumed by a particular group of people (such as industrial workers, agricultural labourers or urban non-manual employees).
- Use: it shows the effect of price changes on the cost of living of that group and is used to fix dearness allowance and to measure retail inflation.
2. WPI — Wholesale Price Index:
- It measures the change in the wholesale (bulk) prices of goods traded in the wholesale market, before they reach the retail stage.
- Use: it is used to measure the general rate of inflation in the economy and to study price trends of commodities.
3. IIP — Index of Industrial Production: …
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