The Plutocratic Bias in the Indian CPI

The Laspeyres-type consumer price index (CPI) is traditionally used to measure the changes in cost-of-living over time. Studies indicate this CPI suffers from a plutocratic bias, attaching greater weightage to expenditure by rich compared to poor; while democratic CPI uses equal weights. The paper calculates the plutocratic bias for the new Indian CPI (launched in 2012), rural and urban CPI, and CPI of three Indian states from 2012-2015. It develops democratic CPI indexes for commodity groups: necessities, luxuries, housing and others; and separate indexes for three consumption brackets. The analysis has important implications for monetary policy and indexation of transfer payments.