India’s New CPI Series: Lower Food Weight, Higher Housing Impact

Why in News ?

According to documents released by the Ministry of Statistics and Programme Implementation (MoSPI), India’s revised Consumer Price Index (CPI) series with 2024 as the base year will significantly reduce the weight of food and beverages from 45.86% to 36.75%.

At the same time, housing will account for a much larger share of the CPI basket. Along with improved methods to measure rent increases, this change is expected to push up measured housing inflation and exert upward pressure on headline retail inflation.

Background: Why Food’s High Weight in CPI Has Been a Concern

Food items dominate India’s CPI basket, meaning sharp swings in food prices often drive headline inflation—regardless of broader price trends in the economy.

• From June 2025, food inflation turned negative, with prices consistently lower than a year earlier.
• This sharply pulled down headline CPI inflation, which fell to an all-time low of 0.25% in October 2025, alongside record-low food inflation of –5.02%.

Such episodes highlight how food price volatility can distort the inflation signal, complicating both economic analysis and policy decisions.

Impact of New CPI Weights on Inflation Readings

Experts estimate that recalculating CPI with the new weights (while keeping price indices unchanged) would imply:

• When food inflation is low, overall CPI could be 20–30 basis points higher than under the current series.
• During periods of high food inflation, CPI could be 20–30 basis points lower than in the existing series.

Thus, the revised weights are expected to make headline inflation less volatile and more reflective of underlying price trends.

Why the RBI Has Been Uneasy with the Current CPI

For the Reserve Bank of India (RBI), the heavy food weight poses challenges because:

• The current CPI is based on 2011–12 consumption patterns, making it outdated.
• According to Engel’s Law, as incomes rise, the share of income spent on food declines—a trend confirmed by recent Indian data.

Based on the 2023–24 Household Consumption Expenditure Survey (HCES):

• Rural households: Food share fell from 52.9% (2011–12) to 47.04%.
• Urban households: Food share declined from 42.62% to 39.68%.

These shifts justify reducing food’s weight to make CPI more current, stable, and representative of actual consumption patterns.

Relief for RBI from Lower Food Weight in CPI

The RBI manages inflation mainly by influencing demand through interest rates. However, it has limited control over supply-side food price shocks, such as poor harvests or global commodity spikes.

In the past:

• High food inflation has kept headline inflation elevated,
• Preventing the RBI from cutting interest rates even when demand conditions were weak.

The Economic Survey 2023–24 suggested exploring inflation targeting that excludes food, but the RBI opposed this, arguing that persistent food inflation cannot be ignored.

Under the current Flexible Inflation Targeting (FIT) framework:

• The RBI targets 4% CPI inflation, with a tolerance band of 2–6%.
• This framework is under review, with the next five-year target (from April) expected to be announced by March.

While the FIT framework is likely to remain unchanged, the lower food weight in CPI could give the RBI greater operational comfort in managing inflation and interest rates.

New CPI Basket: What Is Changing

Timeline for the New CPI Series

• Broad category weights have been released.
• The first inflation data under the new series will be published on February 12 (for January).
• Detailed item-wise weights will be released beforehand.

Expanded Coverage: More Items in the Basket

• The new CPI basket will include 358 items, up from 299 earlier, reflecting evolving consumption patterns.

Reclassification of Categories

• CPI categories have been reorganised, making direct comparison with the old series difficult.
• For example:
  • Education services now carry a 3.33% standalone weight.
  • Earlier, education was a sub-group under “miscellaneous” with a 4.46% weight.

Linking Old and New CPI Series

• To ensure continuity, an expert group has recommended publishing a linking factor between CPI 2012 and CPI 2024 for all-India, rural, and urban indices with the first CPI 2024 release.

Food Weight Falls; Housing Gains Prominence

• Food and beverages: Weight falls from 45.86% → 36.75%, reducing volatility.
• Housing: Weight rises sharply from 10.07% → 17.66%, making it a much more influential driver of inflation.

Why Housing Weight Is Rising

The increase reflects:

• Expanded coverage to include residential utilities such as:
  • Water,
  • Electricity,
  • Gas,
  • Other fuels.
• Higher spending on rent, as per the 2023–24 HCES:
  • Rural rent share: Rose from 0.45% → 0.56%.
  • Urban rent share: Increased from 6.24% → 6.58%.

Additionally, methodological changes—such as excluding employer-provided accommodation from rent measurement—are expected to raise measured housing inflation.

Implications for Inflation and Monetary Policy

• Lower food weight should reduce headline CPI volatility and make inflation data more stable.
• However, the higher housing weight, combined with improved rent measurement, could:
  • Push up housing inflation,
  • Place upward pressure on overall CPI,
  • Potentially affect interest rate decisions.

Overall, the new CPI series is likely to produce inflation readings that are more representative of modern consumption, but also structurally higher in some periods due to housing costs.

Way Forward: Making Inflation Measurement More Effective

To maximise the benefits of the new CPI series, policymakers should:

• Ensure transparent communication of changes and linking factors.
• Regularly update consumption weights to prevent future obsolescence.
• Complement CPI with core inflation measures and alternative price indicators.
• Use improved data to strengthen monetary-fiscal coordination.
• Monitor housing inflation closely and align urban housing policy with inflation management goals.

These steps will help ensure that inflation measurement remains robust, credible, and policy-relevant in a rapidly changing economy.