What is CPI

• Consumer Price Index measures changes in the average prices of a fixed basket of goods and services consumed by households
• It reflects retail inflation, i.e. inflation experienced directly by consumers
• CPI is the primary inflation indicator used for monetary policy in India

Why Base Year Matters

• CPI is calculated with reference to a base year, which represents consumption patterns and prices of a chosen reference period
• Over time, consumption behaviour changes due to:
  • Income growth
  • Urbanisation
  • Technology adoption
  • Subsidies and welfare schemes
• If the base year is outdated, CPI may misrepresent actual inflation experienced by households

Issues with the 2012 Base Year

• Consumption weights were based on 2011–12 Household Consumption Expenditure Survey
• Since then:
  • Share of food in household spending has declined
  • Spending on services, health, transport, education and communication has increased
  • Subsidised food and energy altered effective household expenditure
• Resulted in lower measured inflation, even when households felt prices rising

Perception vs Official Inflation

• Official CPI inflation (Dec 2025): 1.33%
• Household inflation perception (RBI Inflation Expectations Survey):
  • Current: ~6.6%
  • Expected in one year: ~8%
• This divergence highlighted:
  • Under-weighting of frequently used items
  • Poor capture of service-sector inflation
  • Weak representation of regional and income-group variation

New CPI Series (Base Year 2024)

• Base year updated from 2012 to 2024
• New weights derived from Household Consumption Expenditure Survey 2023–24
• Expected improvements:
  • Better reflection of current consumption patterns
  • Higher weight to services and non-food items
  • Improved credibility of inflation data
• First inflation data under new series released from January 2026

Implications for Policy

• More accurate CPI improves:
  • Interest rate decisions by RBI
  • Real wage and pension indexation
  • Fiscal planning and welfare adjustments
• Reduces disconnect between:
  • Statistical inflation
  • Lived inflation experience of households

Structural Limitation of CPI

• National CPI aggregates prices across:
  • Diverse regions
  • Rural and urban areas
  • Income groups
• Even with updated base year:
  • A single number cannot fully capture heterogeneous inflation experiences
  • Supplementary indicators remain important

Overall Significance

• Base year revision is essential for statistical integrity
• Updated CPI strengthens:
  • Inflation targeting framework
  • Public trust in economic data
  • Policy responsiveness to ground realities

A regularly updated CPI is critical for aligning macroeconomic policy with everyday economic experience.