A consumer price index (CPI) is an economic indicator that a country uses to track the growth of its economy. It is a comparative measure of consumer buying power and any resulting inflation. Every government has the freedom to construct its CPI indicator according to the way its economy works. As an example, the eight components of CPI used in the US include the essentials of food and beverages, housing and apparel. It also includes transportation, medical care and recreation, as well as a category for education and communication and another for other goods and services.
An index is a composite of data pulled from a wider universe of information. An index includes a wide range of data, allowing its fluctuations to provide insight into the universe from which the data was pulled. A CPI is a special type of index that is constructed to provide insight into what consumers buy and at what price. This value is used as a measure of inflation, as it shows how much a consumer's income can buy him today, as compared to what it would have bought at some point in the past. The comparison reveals how much faster the cost of consumer purchases has risen over time compared to the rise in incomes.
Government-based statistical agencies decide on the relevant components of CPI. Economists want to measure the segment of society that drives the country's economy, while excluding segments that would skew the results. For example, in the US and other fully industrialized countries, the CPI collects pricing data for urban consumers. The components of CPI for urban consumers in the US includes eight purchasing categories. It assigns three categories to the basics of food, shelter and clothing, and then populates five additional categories with consumables that the government feels represents major areas of the economy.
Some countries are not fully industrialized, and craft their CPI accordingly. India, for example, tracks four different purchasing groups, and publishes four different versions of their CPI. It tracks CPI for agricultural, rural, industrial and urban workers. The most important of the four indicators is the CPI for urban workers, because this segment drives the country's economic growth.
There are five components of CPI for that purchasing group, instead of the eight that the US uses. India places food, beverages and tobacco in the first category. Fuel and light are both in the second, and housing is in the third. Clothing, bedding and footwear are in the fourth category, while miscellaneous items are placed in the fifth.