Why India’s CPI Needs an Urgent Update to Guide Monetary Policy Accurately

Context:

• Retail inflation fell to 0.25% in October, the lowest level since January 2012, raising concerns about the reliability of inflation measurement.

• The editorial argues that the Consumer Price Index (CPI), with a base year of 2012, has become statistically outdated, distorting inflation signals used by the Reserve Bank of India for monetary policy decisions.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

• The sharp fall in headline inflation is largely due to:

  • Food & beverages inflation at –3.7%

  • A high base effect, as food inflation stood at 9.7% in October last year

• This created negative year-on-year inflation, masking price pressures elsewhere.

CPI Structure & Weightage Issues

• Food and beverages carry ~46% weight in the CPI basket.

• Any abnormal movement in food prices disproportionately skews headline inflation.

• Other CPI sub-groups recorded higher inflation than last year, including:

  • Fuel & light

  • Housing

  • Tobacco

  • Miscellaneous services

• GST rate cuts mainly impacted clothing and footwear, not the broader basket.

Disconnect Between CPI and Lived Experience

• A survey showed perceived inflation at 7.4% in September, far higher than the official CPI.

• Highlights a growing gap between:

  • Official statistics

  • Household inflation experience

Implications for Monetary Policy

• The Monetary Policy Committee relies on CPI for:

  • Setting policy repo rates

  • Inflation targeting decisions

• Distorted CPI data risks:

  • Premature rate cuts

  • Misreading of underlying demand and price pressures

• MPC’s December meeting will face uncertainty due to:

  • GST-related distortions

  • Base-effect-driven inflation anomalies

Need for CPI Revision

• The CPI base year 2012 no longer reflects:

  • Changing consumption patterns

  • Rising share of services, housing, health, education

• Ministry of Statistics and Programme Implementation plans to:

  • Release a new CPI series by Q1 of the next financial year

• An updated CPI is essential for:

  • Credible inflation targeting

  • Evidence-based economic governance

Key Concepts Involved:

• Retail Inflation: Rate of increase in prices faced by consumers.

• Consumer Price Index (CPI): Weighted index measuring retail price changes.

• Base Effect: Influence of last year’s price levels on current inflation.

• Monetary Policy Committee (MPC): RBI body responsible for interest rate decisions.

• Statistical Governance: Quality and relevance of official economic data for policymaking.

UPSC Relevance (GS-wise):

GS 3 – Economy

• Inflation measurement and interpretation

• Limitations of CPI-based inflation targeting

• Impact of GST and base effects on macro data

GS 2 – Governance

• Role of statistical institutions

• Evidence-based policymaking

• Data credibility and public trust

Prelims Focus:

• CPI base year and weightages

• Role of MPC and RBI

• Difference between headline inflation and perceived inflation

Mains Enrichment:

• Examine how outdated statistical indices can distort monetary policy transmission.

• Discuss the need for regular revision of economic indicators in a fast-changing economy.