Consumer price index number is measured the changes in the prices paid by the consumers for purchasing a special “basket” of goods and services during the current year as compared to the base year. The basket of goods and services will contain items like (1) Food (2) House Rent (3) Clothing (4) Fuel and Lighting (5) Education (6) Miscellaneous like washing, transport, newspaper etc. Consumer price index number is also called cost of living index numbers or retail price index number.
Construction of Consumer Price Index Numbers:
The following steps are involved in the construction of consumer price index numbers.
(1) Class of People:
The first step in the construction of consumer price index (CPI) is that the class of people should be defined clearly. It should be decided whether the cost of living index number is being prepared for the industrial workers, middle or lower class salaried people living in a particular area. It is therefore necessary to specify the class of people and locality where they reside.
(2) Family Budget Inquiry:
The next step in the construction of consumer price index number is that some families should be selected randomly these families provided information about food, clothing, house rent, miscellaneous etc. The inquiry include questions on family size, income, the quality and quantity consumed and the money spent on them and the weights are assigned in proportions to the expenditure on different items.
(3) Price Data:
The next step is to collect the data on retail prices of the selected commodities for the current period and the base period these prices should be obtained from the shops situated in that locality for which the index numbers are prepared.
(4) Selection of Commodities:
The next step is the selection of the commodities to be included. We should select those commodities which are mostly used by that class of people.