Retail Inflation Measured by New CPI Base Year 2024

Retail Inflation Measured by New CPI Base Year 2024

Why in News? 

India’s retail inflation, measured by the Consumer Price Index (CPI), stood at 2.75% in January 2026, marking the first official reading under the revised CPI series with a new base year of 2024.

• Retail Inflation refers to the rate at which prices of goods and services purchased by households increase over time. It measures the actual cost of living faced by consumers at the retail level.

What is the Consumer Price Index (CPI)?

• About: The Consumer Price Index (CPI) is a statistical measure that tracks the average change in retail prices of goods and services consumed by households over time, reflecting the real cost of living and purchasing power of consumers. 

• Objectives: The main objective of CPI is to measure inflation at the consumer level by capturing price movements in essential consumption items. It helps in monetary policy formulation, wage indexation and pension adjustments.

• Authority: CPI is compiled and released monthly by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI).

• • Types: India publishes multiple CPI indices to represent different population segments:
    • CPI (Combined) – Reflects national retail inflation (Rural + Urban)
    • CPI (Rural) – Consumption pattern of rural households
    • CPI (Urban) – Consumption pattern of urban households
    • CPI-IW – Industrial Workers
    • CPI-AL – Agricultural Labourers
    • CPI-RL – Rural Labourers

• Base Year: CPI calculations are made relative to a base year, which is assigned an index value of 100.  The base year for CPI has been revised from 2012 to 2024 using the Household Consumption Expenditure Survey 2023–24. 

• Components: CPI is calculated using a fixed basket of representative goods and services, whose prices are collected periodically (generally monthly). 

• • • It includes prices of food, clothing, housing, fuel, transport, healthcare, education and services.

• The CPI basket includes 12 consumption divisions (COICOP classification). Major components include: Food & Beverages (≈36.7%), Housing (≈17.66%), Transport (≈8.8%), Health (≈6.1%) and Clothing & Footwear (≈6.38%).

• Calculation: CPI is calculated using the Laspeyres Price Index Formula, which measures price changes relative to the base year by keeping quantities constant: CPI = (Cost of Basket in Current Year ÷ Cost of Basket in Base Year) × 100.

Why Base Year Revision is Necessary in Inflation Measurement?

• Capturing Structural Shifts: As economies grow, their fundamental structures change. In India, for example, the services sector now contributes over 55% of GDP, a massive leap from previous decades. A base year revision allows statisticians to reweight sectors to reflect their current importance, ensuring inflation data isn’t skewed by declining industries. 
• Modernizing Consumption Baskets: Consumer habits evolve with technology and lifestyle changes. Items that were essential in 2012, like landline phones, are now largely replaced by smartphones, digital streaming, and high-speed data. Revision incorporates these new goods and services into the “basket,” making the inflation rate a true reflection of modern cost-of-living. 
• Eliminating Price Distortions: Using an outdated base year for too long can lead to “price creeping,” where prolonged inflation distorts the real value of goods. By resetting the index to a more recent, stable year, economists can more accurately “deflate” nominal figures to calculate Real GDP. 
• Integrating New Data Sources: Modern revisions leverage advanced data infrastructure. Instead of relying solely on traditional surveys, newer series integrate GSTN filings, UPI transaction data, and e-way bills. This high-frequency data provides a more granular and timely understanding of price movements across urban and rural landscapes. 
• Global Standard Alignment: International bodies like the IMF and United Nations recommend updating base years every 5 to 7 years to maintain global comparability. India’s recent move to update its decade-old base year (2011-12) addresses critiques regarding data adequacy and boosts investor confidence by aligning with global best practices. 
• Better Policy Formulation: Central banks, such as the Reserve Bank of India (RBI), use inflation data to set interest rates. If inflation is measured using an irrelevant basket, policy responses may be flawed. An updated base year provides the “sharper signals” needed for effective monetary and fiscal planning. 

Key Changes in CPI Basket, Weightage and Methodology under Base Year 2024

• Major Reduction in Food Weightage: The most significant change is the sharp decline in the weight of Food and Beverages, which has dropped to 36.75% from the earlier 45.86%. This shift follows Engel’s Law, which states that as household incomes rise, the proportion spent on food decreases. This reduction is expected to moderate headline volatility, as food prices are traditionally the most unstable component of the index. 
• Expansion of the Item Basket: The consumption basket has been expanded from 299 to 358 items, covering 308 goods and 50 services. Obsolete items like VCRs, audio cassettes, and horse carts have been removed. In their place, modern essentials have been added, including smartphones, OTT subscriptions (online streaming), exercise equipment, and value-added dairy products like cheese and flavored milk. 
• Adoption of Global Classification Standards: India has moved from its legacy 6-group structure to the 12-division framework prescribed by the United Nations’ COICOP 2018 (Classification of Individual Consumption According to Purpose). This provides more granular data across categories such as Information & Communication, Personal Care, and Social Protection, ensuring that India’s inflation data is globally comparable for international investors and bodies like the IMF. 
• Inclusion of Rural House Rent: For the first time, the CPI will formally track Rural House Rent, filling a critical gap in the earlier series which only measured urban housing. Additionally, the weightage for Housing, Water, Electricity, and Fuel has increased to 17.67%, reflecting the growing impact of urbanization and modern utility costs on the average Indian household’s budget. 
• Digitalized Data Collection Methodology: The methodology has moved from manual “pen-and-paper” records to Computer Assisted Personal Interviewing (CAPI). Field officers now use handheld tablets with geo-tagging and real-time validation checks. Furthermore, the index now integrates e-commerce price data from 12 major online markets in large cities, ensuring that the shift toward online shopping is accurately captured. 
• Strategic Sourcing of Service Prices: To improve accuracy, prices for several key services are now sourced directly from official digital platforms. This includes airfares from airline websites, telecom tariffs from operator databases, and postal charges from India Post. By using administrative and high-frequency digital data, the Ministry of Statistics (MoSPI) has reduced the lag and human error associated with traditional surveys.

Implementation of Revised 2024 CPI Base Year 

• RBI Monetary Policy Calibration: The 2024 revision, with its reduced weight on volatile food items, is expected to result in smoother headline inflation prints. This allows the Monetary Policy Committee (MPC) to focus more on aggregate demand pressures and core inflation rather than reacting to supply-side shocks, leading to more stable interest rate environments. 
• Enhanced Cost of Living Measurement : The new series provides a more precise measure of the actual cost of living by incorporating modern expenses like digital streaming, gym equipment, and rural house rent. This improved granularity reduces the “urban bias” of previous indices. 
• Welfare Scheme and Subsidy Targeting: Accurate inflation data improves the targeting efficiency of government welfare programs. By capturing regional price realities more effectively, policymakers can better align subsidies, social transfers, and benefits with actual needs.  
• Real Income and Wage Assessment: The 2024 base year is essential for evaluating real income growth and purchasing power. CPI-linked indices are used to determine Dearness Allowance (DA) revisions for millions of government employees and pensioners.