What is CPI and why does the government track it regularly?

The Consumer Price Index (CPI) tracks the change in retail prices of essential goods and services consumed by households. The index tracks these prices at the level of a particular item, its rural and urban price movement as well as the price movement of the entire basket of goods and services at rural, urban as well as at an all-India level.

The index has different weights attached to different items in the basket. The weight for a single item can also vary for the urban and rural index. For instance, food and beverages category carries 54.18% weight in the rural CPI, while it carries only 36.29% weight in the urban index.

The change in index over a period of time is CPI inflation. CPI is widely used by most countries as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. At present, the Reserve Bank of India targets CPI-based inflation to be within 2% of the 4% target.