​Overdue upgrade: On the new series of the Consumer Price Index

Context & The Gist

The release of the new Consumer Price Index (CPI) series with a base year of 2024 is a significant development. This update addresses long-standing concerns about the accuracy and relevance of the previous CPI series, which was based on 2012 and reflected consumption patterns from 2011-12. India’s economic landscape and consumption habits have evolved considerably since then, necessitating this revision.

The central thesis of the article is that the new CPI series will provide a more accurate and stable measure of inflation, leading to better-informed policymaking by both the government and the Reserve Bank of India (RBI). Key changes include a reduced weightage for food and beverages, increased coverage of goods and services, and the inclusion of data from online marketplaces.

Key Arguments & Nuances

• Changing Consumption Patterns: The article highlights how India’s consumption patterns have shifted, with increased access to free foodgrain reducing expenditure on food and the emergence of new services like OTT platforms.
• Reduced Food Weightage: Lowering the weightage of food and beverages (from 45.86% to 36.75%) is crucial as food inflation historically had an outsized impact on the overall CPI, despite its shrinking share in household budgets.
• Increased Granularity: The new index covers more items and includes data from more marketplaces, including 12 online platforms, enhancing its representativeness.
• Impact on Policymaking: More accurate inflation data will improve budgetary predictability (through dearness allowance/relief) and enable the RBI to make more informed monetary policy decisions.
• Data Back Series: The article points out a critical gap – the lack of a back data series calculated using the new methodology, hindering comparative analysis.

UPSC Syllabus Relevance

• Indian Economy (GS Paper III): Inflation measurement, Monetary Policy, and their impact on the economy.
• Government Budgeting (GS Paper III): The link between CPI and budgetary provisions like dearness allowance/relief.
• Data and Statistics (GS Paper I/III): Understanding the importance of accurate data for policymaking and economic analysis.

Prelims Data Bank

• CPI Base Year: The new CPI series has a base year of 2024, replacing the previous base year of 2012.
• Household Consumption Expenditure Survey (HCES): The new series is pegged to consumption patterns from the HCES 2023-24.
• Food & Beverage Weightage: The weightage of food and beverages in the CPI has been reduced to 36.75% from 45.86%.
• RBI’s Inflation Target: The Reserve Bank of India (RBI) aims to maintain inflation at 4% with a tolerance band of +/- 2%.

Mains Critical Analysis

The new CPI series is a welcome step towards improving the accuracy and relevance of inflation measurement in India. However, several critical issues need consideration.

Challenges

• Data Lag: Despite the update, there's an inherent lag in reflecting real-time changes in consumption patterns. The five-year revision plan is crucial to avoid a repeat of the 11-year gap.
• Representativeness: While the inclusion of online marketplaces is a positive step, ensuring the representativeness of the sample across diverse regions and income groups remains a challenge.
• Back Data Series: The absence of a back data series using the new methodology hinders meaningful comparison with historical trends and limits the usefulness of the index for long-term analysis.
• Informal Sector: Accurately capturing price movements in the informal sector, which constitutes a significant portion of the Indian economy, remains a persistent challenge.

Opportunities

• Improved Policy Formulation: A more accurate CPI will enable the government and the RBI to formulate more effective monetary and fiscal policies.
• Enhanced Budgetary Planning: Predictable inflation data will improve budgetary planning and reduce uncertainties related to dearness allowance/relief.
• Increased Transparency: Regular revisions and transparent methodology will enhance the credibility of the CPI and foster public trust.

Value Addition

• Alagh Committee (1991): This committee recommended the use of the CPI as the main measure of inflation in India.
• C. Rangarajan Committee (2014): This committee suggested methodological improvements to the CPI and advocated for more frequent revisions.
• SC Judgement (2019): The Supreme Court directed the government to ensure that the CPI accurately reflects the cost of living for different sections of society.

Context & Linkages

This past article foreshadowed the current update, emphasizing the need for a new CPI series to address the disconnect between official inflation data and household perceptions. It highlighted the outdated nature of the previous index and the importance of incorporating current consumption patterns and subsidies, which are now being addressed in the 2024 series.

This article provided an initial assessment of the new CPI series, noting the decreased weightage for food and the increased importance of housing and services. It underscored the potential for the updated index to influence the RBI’s monetary policy decisions by providing a more accurate picture of inflation.

This article highlighted the urgency of revising the CPI due to statistical anomalies and a significant gap between measured and perceived inflation. It emphasized the challenges faced by the RBI’s Monetary Policy Committee due to the outdated index and the expectation of a new series in early 2026, which is now being realized.

This article discussed the exceptionally low retail inflation in November 2025, largely attributed to base effects, and reiterated the need for a new CPI series to provide a more accurate reflection of economic realities. It also noted the RBI’s interest rate cut and the expectation of the updated CPI in early 2026.

This article highlighted broader data deficiencies in India, including the outdated base year of the CPI, which contributed to the IMF’s low grading of India’s national accounts statistics. It underscored the importance of updating the CPI and other key economic indicators to improve data quality and policymaking.

The Way Forward

• Provide Back Data Series: MoSPI should prioritize the release of a back data series calculated using the new methodology to facilitate comparative analysis.
• Regular Revisions: Adhere to the five-year revision plan to ensure the CPI remains relevant and reflects evolving consumption patterns.
• Improve Data Collection: Enhance data collection methods to ensure greater representativeness, particularly in the informal sector and across diverse regions.
• Strengthen Statistical Capacity: Invest in strengthening the statistical infrastructure and capacity of MoSPI to improve data quality and timeliness.