India Changes How It Measures Prices with New Inflation List

India has updated its list for tracking the cost of living. The new list, called the Consumer Price Index, now includes more items like airfares and online subscriptions. This helps show a more accurate picture of how prices are changing for people.
By Newsroom | Economy, India |

## The way India tracks the rising cost of goods and services has changed, bringing in new items like airfares and online subscriptions to better reflect modern spending habits. This shift, marked by the introduction of a new Consumer Price Index (CPI) series with 2024 as the base year, aims to provide a more accurate picture of inflation for policymakers, including the Reserve Bank of India (RBI), and ultimately, the public.

Evolving Consumption Patterns Drive CPI Revision

India's economic landscape and consumer habits have transformed, necessitating an update to how inflation is measured. The older CPI series did not fully capture the growing expenditure on services and digital goods.

From roti to OTT: New inflation math tells story of new India - 1

  • The new CPI series now includes a broader range of items, expanding from 299 to 358 in its basket.

  • Key additions reflect contemporary spending, such as airfares, online shopping, and Over-The-Top (OTT) subscription services.

  • This revision is intended to make inflation data more aligned with actual consumer spending, particularly among urban populations and younger households.

  • The base year has been shifted to 2024, a standard practice to recalibrate the index to current economic realities.

Adjustments to Basket Weights and Measurement

The overhaul involves not only adding new items but also re-evaluating the importance of existing categories.

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  • Food and beverages, which previously held a significant weight, have seen their proportion reduced in the new series. This recalibration is expected to smooth headline inflation figures.

  • Conversely, the weight of core goods and services has increased, reflecting their growing influence on overall price changes.

  • Housing inflation is now calculated using a composite index that includes actual rental payments, maintenance, and related services, with rural housing explicitly incorporated.

Implications for Policy and Market Perception

The updated CPI is a critical tool for the RBI, which uses it as the primary gauge for setting monetary policy.

From roti to OTT: New inflation math tells story of new India - 2

  • A more representative inflation measure is expected to provide clearer signals of underlying price trends, potentially influencing interest rate decisions.

  • Analysts suggest that a lower food weighting and a greater emphasis on services may lead to more stable inflation readings. However, these readings might also become more sensitive to changes in rents, fuel costs, and service prices.

  • The revision aligns India’s inflation measurement with global standards, where food typically has a smaller weight in the CPI basket.

Evidence of Change in Inflation Measurement

Several indicators highlight the changes implemented in India's CPI.

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  • The number of items in the CPI basket has increased from 299 to 358.

  • New categories such as airfares, online shopping, and OTT rates are now included.

  • The base year for the CPI has been updated to 2024.

  • Housing inflation calculation has been revised to a composite index.

  • The share of food and beverages in the CPI basket has been reduced, while the share of core goods has increased.

Expert Analysis on CPI Overhaul

Economists and analysts observe that the revamped CPI series offers a more precise reflection of the Indian economy.

From roti to OTT: New inflation math tells story of new India - 3

  • “The updated inflation basket now reflects price movements in categories that are expected to make inflation data more aligned with how consumers actually spend today, especially in urban areas and among younger households.” - Article 1

  • “With the updated base year and a rejig in the basket reflecting changes in household spending, the new series is expected to help gauge inflation more accurately. The revised structure brings India’s inflation basket more in line with global standards.” - Article 2

  • “Analysts note that services inflation has become a more persistent driver of price pressures, making its accurate measurement crucial for policymakers.” - Article 8

  • The revised series aims to produce a more representative inflation measure as incomes rise and households shift spending from basic staples to services and discretionary consumption. - Article 4

Core Changes in the New CPI Series

The modifications to the CPI basket are designed to capture the evolving nature of consumption in India.

Inclusion of Modern Consumption Categories

The expansion of the CPI basket directly addresses the changing ways households allocate their budgets.

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From roti to OTT: New inflation math tells story of new India - 4

  • Digital Services and Travel: Items like airfares and OTT subscriptions, once considered discretionary, are now part of regular household expenditure for many. Their inclusion provides a more granular view of price changes.

  • Online Retail: The growing prevalence of e-commerce necessitates the tracking of price variations in online purchases.

Recalibration of Basket Weights

The adjustment in the weighting of different categories aims to better reflect their impact on the average consumer's budget.

  • Reduced Food Weight: While food prices remain significant, their proportionate impact on the overall inflation index is adjusted downwards. This may lead to less dramatic swings in headline inflation.

  • Increased Services Weight: As the economy diversifies and incomes grow, spending on services like healthcare, education, and entertainment tends to rise. The increased weight reflects this trend.

Refined Housing Inflation Measurement

The methodology for calculating housing inflation has been made more comprehensive.

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  • The new composite index accounts for actual rents paid, providing a direct measure of housing cost increases.

  • The inclusion of rural housing costs ensures a more balanced representation across different regions.

Conclusion: A More Nuanced Inflation Picture

The introduction of the new CPI series with a 2024 base year represents a significant step towards more accurate and relevant inflation measurement in India. By incorporating modern consumption patterns and refining calculation methodologies, the updated index is expected to provide policymakers, particularly the RBI, with better insights into price dynamics. This, in turn, can lead to more informed monetary policy decisions and a clearer understanding of the economic realities faced by Indian consumers.

Sources Used

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Frequently Asked Questions

Q: What is the new inflation list in India?
India has a new list called the Consumer Price Index (CPI) to track how much prices for things are going up. It uses the year 2024 as a starting point.
Q: What new things are on the list?
The new list includes more items that people buy now, like tickets for planes, online shopping, and subscriptions for shows like Netflix. It has grown from 299 items to 358 items.
Q: Why did they change the list?
People's spending habits have changed. The old list did not show how much money people spend on services and digital things. The new list shows a more real picture of how people spend their money today.
Q: How does this affect people?
This helps the government and the Reserve Bank of India make better choices about money and interest rates. It gives a clearer idea of how prices are really changing for everyone.