Why in the news?
India’s new Consumer Price Index (CPI) series with base year 2024 will reduce the weight of food and beverages from 45.86% to 36.75%, aligning the inflation basket with updated household consumption patterns from the 2023–24 Household Consumption Expenditure Survey (HCES).
What is CPI?
The Consumer Price Index (CPI) measures retail inflation by tracking changes in prices of goods and services consumed by households.
It is:
- The headline inflation measure in India
- Used by the Reserve Bank of India for monetary policy
- Based on periodic base year revision to reflect current consumption patterns
Key Changes in the New CPI Series
- Food Weight Reduced
- From 45.86% → 36.75%
- Reflects decline in food expenditure share
- Based on Engel’s Law: As income rises, share of food expenditure falls
- HCES Findings:
- Rural food share: 52.9% (2011–12) → 47.04% (2023–24)
- Urban food share: 42.62% → 39.68%
- Housing Weight Increased
- From 10.07% → 17.66%
- Now includes: Water, Electricity, Gas and Other fuels
- Methodological change: Employer provided accommodation excluded
- This may exert upward pressure on inflation.
- Basket Expansion
- Items increased from 299 → 358
- Reclassification of categories
- Linking factor to be released for back series comparison
Why Was High Food Weight a Concern?
- Food inflation is often supply driven.
- Monetary policy cannot control vegetable or cereal supply in short run.
- High food weight caused:
- Excess volatility in headline inflation
- Constraints on repo rate decisions
Example:
- October 2025 CPI: 0.25%
- Food inflation: (-)5.02%
- Food price fall dragged headline inflation sharply lower
Implications for RBI
- The RBI follows Flexible Inflation Targeting (FIT):
- Target: 4%
- Tolerance band: 2–6%
- Mandated under RBI Act amendment (2016)
- Lower food weight may:
- Reduce volatility
- Give clearer signal of core inflation
- Improve monetary policy transmission
- However, higher housing weight may increase measured inflation.
| [2020] Consider the following statements:
1. The weightage of food in Consumer Price Index (CPI) is higher than that of Wholesale Price Index (WPI). 2. The WPI does not capture changes in the prices of services, which CPI does. 3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates. Which of the statements given above is/are correct? (a) 1 and 2 only (b) 2 only (c) 3 only (d) 1, 2 and 3 |
Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024
