Recalibration of Consumer Price Index (CPI) Components
The recalibration of weights for CPI components, to be released on February 12, is anticipated to slightly increase India's headline inflation. The share of core items is expected to rise by around 10 percentage points, while volatile food prices will have a reduced impact.
Changes in Weightage
- Food and Beverages: Proposed reduction of weight by nearly one-fifth, from 45.86% to 36.75%.
- Core Inflation: Estimated at 4.6% in December 2025; overall retail inflation was 1.3%.
- Urban CPI and Services: Increased emphasis, with significant rise in weights for restaurants and accommodation services, transport, and information and communications.
- Reductions: Observed in food and beverages (9.1%), education services (1.13%), and clothing and footwear (0.15%).
Economic Impact and Predictions
- New series expected to aid the RBI's inflation targeting and predictability.
- Nominal GDP Growth: Expected to align closer to a 10-10.5% mean rate.
- Evaluations by Banks:
- Canara Bank expects retail inflation to align closer to 4%.
- Nomura anticipates headline inflation to have averaged higher at 2.2% year-on-year under new weighting.
Expectations and Challenges
- The new CPI series may smoothen volatility in the CPI readings, aiding policy predictability.
- Free items distributed through public systems are excluded, providing clearer market signals.
- Despite expected uptick in CPI prints, economists foresee minimal change in the RBI's near-term policy stance.
- Changes in housing index sub-components, such as inclusion of rural housing rent costs, are yet to be fully assessed.
Conclusion
While the recalibrated CPI weights suggest a technical shift that may not significantly alter monetary policy, the changes aim to provide a more accurate reflection of price trends, thus aiding economic predictability and stability.
