What Happened
India’s retail inflation, measured by the Consumer Price Index (CPI), stood at about 1.33% year-on-year in December 2025, well below the Reserve Bank of India’s target range of 2% to 6%. At the same time, the government is preparing to release a revised CPI series with a new base year of 2024 to better reflect current consumption patterns.
Context: Why CPI Needs Rethinking
The Consumer Price Index is the main tool used to track changes in the cost of living. It influences monetary policy decisions, wage revisions, and social welfare adjustments. India’s current CPI series is based on consumption patterns from 2012, a period before rapid urbanisation, digital services expansion, and changes in household spending priorities.
Over the last decade, households have shifted spending toward services such as healthcare, education, transport, and digital connectivity. However, these changes are not fully captured in the existing CPI framework. As a result, headline inflation numbers can appear low even when many households experience rising living costs, especially in urban areas.
What the Consumer Price Index Measures
The Consumer Price Index tracks the average change over time in prices paid by consumers for a fixed basket of goods and services. It focuses on retail prices faced by households.
India uses multiple CPI indices for different purposes:
- CPI (Combined – Rural and Urban) is used for inflation targeting by the RBI.
- CPI for Industrial Workers is used to revise dearness allowance for employees.
- CPI for Agricultural and Rural Labourers tracks price changes affecting rural workers.
Food and beverages carry the highest weight in CPI, followed by services such as health, education, transport, and housing.
Key Issues With the Current CPI Framework
Heavy Dependence on Food Prices
Food accounts for nearly half of the CPI basket. This makes inflation highly sensitive to monsoon conditions, supply disruptions, and seasonal price swings, even when demand conditions remain stable.
Underrepresentation of Modern Services
Many essential modern expenses, such as digital services, private education, healthcare, and urban transport, are not adequately reflected. This leads to an underestimation of cost-of-living pressures for urban and middle-income households.
Supply-Driven Inflation Dominance
Inflation in India is often driven by supply-side shocks like food shortages or global fuel prices. Such inflation is less responsive to interest rate changes, complicating monetary policy decisions.
Limited Regional Detail
National CPI averages mask sharp price differences across states and cities. This reduces the usefulness of CPI data for designing region-specific fiscal or market interventions.
Weak Link With Wage Growth
Even when headline inflation is low, slow wage growth—especially in the informal sector—can erode real incomes. This disconnect means price stability does not always translate into improved living standards.
What Changes Are Being Considered
Updating the Base Year
Revising the base year to 2024, using the latest Household Consumption Expenditure Survey, will update item weights and reflect current spending habits.
Rebalancing CPI Weights
As incomes rise, households spend a smaller share on food and more on services. Adjusting weights in line with this shift can make CPI more representative.
Better Measurement of Housing and Services
Improved tracking of rental markets, education fees, healthcare costs, and transport services can align CPI more closely with real household expenses.
Improving Data and Coverage
Expanding price collection centres, using digital price data, and improving quality adjustments can help capture hidden inflation in informal markets.
Managing Supply-Side Inflation
Structural reforms in agriculture, logistics, and market integration can reduce seasonal price volatility and improve the reliability of CPI as a policy tool.
Why This Matters
For households, an accurate CPI determines whether rising living costs are properly recognised.
For governance, CPI shapes interest rate decisions, welfare benefits, and wage revisions.
For policy, a more representative index improves coordination between monetary and fiscal responses.
For the future, timely updates ensure inflation data keeps pace with a changing economy.
What Readers Should Understand
The Consumer Price Index remains central to India’s economic management, but outdated weights and coverage limit its accuracy. Updating the CPI base year and methodology is essential to reflect modern consumption patterns and regional realities. A more representative CPI will help policymakers respond better to inflation while safeguarding household purchasing power.