Consumer price index numbers measure the changes in the prices paid by consumers for 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) Rent (3) Clothing (4) Fuel and Lighting (5) Education (6) Miscellaneous like cleaning, transport, newspapers, etc. Consumer price index numbers are also called cost of living index numbers or retail price index numbers.
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 the 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 industrial workers, or 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 a consumer price index number is that some families should be selected randomly. These families provide information about the cost of food, clothing, rent, miscellaneous, etc. The inquiry includes questions on family size, income, the quality and quantity of resources 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 data on the retail prices of the selected commodities for the current period and the base period when these prices should be obtained from the shops situated in the 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 most often used by that class of people.