Context:
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Retail inflation fell to 0.25% in October, the lowest level since January 2012, raising concerns about the reliability of inflation measurement.
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The editorial argues that the Consumer Price Index (CPI), with a base year of 2012, has become statistically outdated, distorting inflation signals used by the Reserve Bank of India for monetary policy decisions.
Key Highlights:
Statistical Anomaly Behind Low Inflation
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The sharp fall in headline inflation is largely due to:
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Food & beverages inflation at –3.7%
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A high base effect, as food inflation stood at 9.7% in October last year
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This created negative year-on-year inflation, masking price pressures elsewhere.
CPI Structure & Weightage Issues
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Food and beverages carry ~46% weight in the CPI basket.
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Any abnormal movement in food prices disproportionately skews headline inflation.
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Other CPI sub-groups recorded higher inflation than last year, including:
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Fuel & light
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Housing
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Tobacco
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Miscellaneous services
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GST rate cuts mainly impacted clothing and footwear, not the broader basket.
Disconnect Between CPI and Lived Experience
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A survey showed perceived inflation at 7.4% in September, far higher than the official CPI.
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Highlights a growing gap between:
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Official statistics
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Household inflation experience
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Implications for Monetary Policy
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The Monetary Policy Committee relies on CPI for:
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Setting policy repo rates
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Inflation targeting decisions
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Distorted CPI data risks:
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Premature rate cuts
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Misreading of underlying demand and price pressures
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MPC’s December meeting will face uncertainty due to:
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GST-related distortions
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Base-effect-driven inflation anomalies
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Need for CPI Revision
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The CPI base year 2012 no longer reflects:
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Changing consumption patterns
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Rising share of services, housing, health, education
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Ministry of Statistics and Programme Implementation plans to:
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Release a new CPI series by Q1 of the next financial year
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An updated CPI is essential for:
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Credible inflation targeting
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Evidence-based economic governance
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Key Concepts Involved:
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Retail Inflation: Rate of increase in prices faced by consumers.
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Consumer Price Index (CPI): Weighted index measuring retail price changes.
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Base Effect: Influence of last year’s price levels on current inflation.
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Monetary Policy Committee (MPC): RBI body responsible for interest rate decisions.
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Statistical Governance: Quality and relevance of official economic data for policymaking.
UPSC Relevance (GS-wise):
GS 3 – Economy
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Inflation measurement and interpretation
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Limitations of CPI-based inflation targeting
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Impact of GST and base effects on macro data
GS 2 – Governance
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Role of statistical institutions
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Evidence-based policymaking
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Data credibility and public trust
Prelims Focus:
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CPI base year and weightages
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Role of MPC and RBI
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Difference between headline inflation and perceived inflation
Mains Enrichment:
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Examine how outdated statistical indices can distort monetary policy transmission.
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Discuss the need for regular revision of economic indicators in a fast-changing economy.