Base year of CPI-IW changed

The Labour and Employment Ministry on Thursday revised the base year of the Consumer Price Index for Industrial Workers (CPI-IW) from 2001 to 2016.

Why the base year for the Consumer Price Index for Industrial Workers(CPI-IW) has been changed?

Due to the changing consumption pattern, more weightage has been given to spending on health, education, recreation and other miscellaneous expenses while the weight of food and beverages has been reduced.

Consumer Price Index (CPI) for Industrial Workers

It measures changes in the price level of a market basket of consumer goods and services purchased by households.

CPI data is released monthly by the Central Statistics Office (CSO) which functions under the Ministry of Statistics and Programme Implementation.

There are four types of CPI: a) CPI-IW (Industrial Worker), b) CPI-UNME (Urban Non-Manual Employees), c) CPI-AL (Agricultural Labourers) and d) CPI-RL (Rural Labourers)

RBI has adopted CPI as the key measure for determining the inflation situation of the Indian economy on the recommendation of the Urjit Patel Committee.

Usage of CPI-IW

CPI-IW  is used:

• To regulate the dearness allowance (DA) of government staff and industrial workers.
• Apart from measuring inflation in retail prices.
• To revise minimum wages in scheduled employments.

After this Index, the government is expected to announce a new series of the CPI for agriculture workers, which is currently using the base year of 1986-87.

Need for Base years 

Base years are required to facilitate inter-year comparisons of various data.  if an index is using 2011-12 as the base year, data of all future years will be calculated based on the data of the index in 2011-12, for the purpose of comparison.

Example: Let’s say the cost of a basket of goods in an index was Rs 6 lakh in the base year (2016), and has been set to an index value of 100. If in 2017,  the basket cost has been increased to Rs 6.6 lakh, the index equivalent would be 110.

The inflation rate will be computed by comparing 110 which is today’s value to the base value which is 100, resulting in a 10% increase.

Base years are used to nullify the impact of inflation on the data and project the actual estimates.

Thus, for selecting a year as the base year, certain requirements should be fulfilled, such as:

• The year must be a normal year and not have experienced any abnormal incidents such as earthquakes, droughts, floods,  etc.
• No abnormal economic activity like Hyper rise in price should have taken place.
• Base year should not be very far from the current year.