New Inflation Series
Context:
The Ministry of Statistics and Programme Implementation (MoSPI) has released documents regarding a new headline inflation series, shifting the base year to 2024 for calculating the Consumer Price Index (CPI).
It is important to note that, RBI uses CPI to set repo rate under the Flexible Inflation Targeting (FIT) framework
Key Changes in the New Series:
India is updating the Consumer Price Index (CPI) basket for measuring inflation, with 2024 as the new base year (previous base year was 2011-12).
Weightage Adjustments:
Food and Beverages:
The weight of this category has been significantly reduced from 45.86% to 36.79%.
Housing:
This category has become a "more prominent component" of the CPI basket.
Housing will become more important in the CPI, rising from 10.07% to 17.66% of the basket.
Education now 3.33% of CPI, earlier part of miscellaneous at 4.46%
New methodologies have been adopted to measure rent increases more accurately.
Impact:
CPI is the measure RBI uses to target inflation (currently 4% ± 2%). Changing weights affects the headline inflation number and monetary policy decisions
Inflationary Pressure:
The changes, particularly the accurate measurement of rent, are likely to result in higher housing inflation and exert upward pressure on overall retail inflation.
Recalculation Effect:
Calculations applying the new weights to the unchanged index indicate that the overall CPI would increase marginally by 20-30 basis points (bps).
Food Inflation Sensitivity:
While the new series might show lower CPI in months where food inflation is high (due to reduced weight), the structural changes generally point to a slight increase in headline numbers.
Thus, CPI will be less sensitive to food price swings.