Why in news ?
New base year and latest inflation
- MoSPI released a new CPI series with base year 2024, replacing 2012, reporting January 2026 retail inflation at 2.75%, within RBI’s tolerance band.
- As it is the first release under the new base, long-term comparison with old series is limited, a common transition issue seen in statistical rebasing globally.
Relevance
- GS III (Indian Economy): Inflation measurement, monetary policy, RBI inflation targeting, statistics in policymaking.
Practice question
- Discuss the importance of accurate inflation measurement for monetary policy and welfare delivery in India.(250 Words)
Basics and static context
What is CPI and why it matters ?
- Consumer Price Index (CPI) measures change in retail prices of a fixed basket of goods and services consumed by households; it is India’s main indicator of inflation and cost of living.
- CPI is used by the RBI for inflation targeting (4% ±2%) under the Monetary Policy Framework Agreement, guiding repo rate decisions that affect loans, savings and growth.
Who compiles CPI ?
- CPI is compiled by MoSPI’s National Statistical Office (NSO) through nationwide price collection; methodology aligns with international standards used by UN, IMF and ILO for comparability.
- India publishes multiple CPIs (Rural, Urban, Combined), but CPI-Combined is the key headline number for macroeconomic policy and RBI targeting.
What changed in the new CPI ?
Updated consumption basket
- Total items increased from 299 to 358, reflecting diversification of consumption; goods rose to 308 and services to 50, capturing modern spending like telecom and services better.
- Basket weights are derived from HCES 2023–24, ensuring CPI mirrors current household spending, unlike outdated baskets that may over/understate inflation.
Wider data coverage
- Rural price collection expanded to 1,465 markets (from 1,181) and urban to 1,395 (from 1,114), improving geographical representation and statistical reliability.
- Larger sample sizes reduce volatility and bias, similar to how periodic updates improved accuracy in GDP and IIP series.
Economic rationale for rebasing
Reflecting structural change
- Over a decade, rising incomes, urbanisation and digitalisation shift spending toward services, health, education and communication, requiring updated CPI weights.
- Without rebasing, inflation may be mismeasured; for example, over-weighting cereals when diets diversify could distort true cost-of-living changes.
Policy credibility
- Accurate CPI strengthens monetary policy credibility, as RBI decisions depend on realistic inflation signals.
- Investors and rating agencies rely on credible inflation data for macroeconomic assessments.
Limitations and cautions
Comparability issues
- New base breaks direct comparison with older series; analysts often create back-casted series later for continuity.
- Short-term movements may reflect methodological shifts as well as real price changes.
Data challenges
- Informal markets, quality changes and new products complicate price measurement, a universal CPI challenge noted by statistical agencies worldwide.
- Rapid tech evolution (e.g., smartphones) requires frequent basket updates to avoid substitution bias.
Way forward
Strengthening price statistics
- Regular 5-year rebasing cycles can keep CPI aligned with fast-changing consumption patterns.
- Greater use of digital price collection and scanner data can improve timeliness and coverage.
Communication and transparency
- Clear public communication on methodology helps avoid misinterpretation of inflation trends during base changes.
- Publishing concordance tables between old and new series aids researchers and policymakers.
CPI vs WPI
| Feature | CPI (Consumer Price Index) | WPI (Wholesale Price Index) |
| Meaning | Measures change in retail prices faced by consumers | Measures change in wholesale prices at producer/wholesaler level |
| Compiled by | NSO (MoSPI) | Office of Economic Adviser, DPIIT (Ministry of Commerce) |
| Base Year (latest) | 2024 (new series) | 2011–12 |
| Purpose | Measures cost of living & inflation for consumers | Measures price trends in bulk trade/production |
| Coverage | Goods + Services | Only Goods (no services) |
| No. of items | ~358 items (new series) | ~697 items |
| Major weight | Food & beverages have high weight (~45% earlier series) | Manufactured products have highest weight (~64%) |
| Population scope | CPI-Rural, CPI-Urban, CPI-Combined | Single national index |
| Policy relevance | RBI uses CPI for inflation targeting (4% ±2%) | Used for business decisions, deflator in national accounts |
| Reflects | Demand-side inflation (consumer impact) | Supply-side/producer inflation |
| Volatility | More volatile due to food & fuel | Less volatile than CPI in many cases |
| Global comparability | Internationally used for inflation targeting | Less used globally for policy targeting |
| Example use | DA revision, wage indexation | Industrial price trends, contract escalation |
