Reimagining India’s Consumer Price Index

Introduction

The Consumer Price Index (CPI), which measures changes in retail prices, was 1.33% year-on-year in December 2025. This is much lower than the Reserve Bank of India’s target range of 2% to 6%, showing that overall price pressures in the economy are quite low.

However, this headline figure does not show the full picture. There is still negative food inflation and differences between rural and urban price trends, which make policymaking more complex.

A revised CPI series with base year 2024 is expected to be released soon. Meanwhile, concerns about the cost of living continue, especially for vulnerable households. Because of this, understanding how CPI behaves is important for making balanced and effective policy decisions.

What is the Consumer Price Index (CPI)? 

The Consumer Price Index (CPI) is a statistical tool that shows how the prices of everyday goods and services change over time. It tracks what consumers pay for a fixed basket of items used in daily life, so it helps measure the cost of living.

Another measure is the Wholesale Price Index (WPI), which tracks changes in the prices of goods at the wholesale or producer level, before they reach consumers. In India, retail inflation, which is measured using the CPI, was 1.33% in December 2025.

• Key Types of CPI:
  • CPI Combined (Rural+Urban): 
    • Base year: 2012, used as the headline inflation indicator and for RBI’s monetary policy (inflation targeting). 
  • CPI for Industrial Workers (IW):
    • Base year: 2016, used for Dearness Allowance (DA) revision of industrial and central government employees. 
  • CPI for Agricultural Labourer (AL): 
    • Base year: 2019, used to track the cost of living changes (inflation) for agricultural workers in India, used for wage fixation and social security analysis. 
  • CPI-Rural Labourers (CPI-RL):
    • Base year: 2019, measures price changes faced by rural labour households, used for fixing minimum wages and evaluating rural livelihood conditions.
      • The National Statistical Office (NSO) releases CPI-Combined, CPI-Rural, and CPI-Urban for measuring retail inflation and policy use, while the Labour Bureau releases CPI-Industrial Workers, CPI-Agricultural Labourers, and CPI-Rural Labourers mainly for wage fixation, DA revision, and labour welfare purposes. 
• Components:
  • Food and Beverages (45.86%) – Highest weight 
  • Miscellaneous (28.32%) – Health, education, transport 
  • Housing (10.07%) 
  • Fuel and Light (6.84%) 
  • Clothing and Footwear (6.53%) 
  • Pan, Tobacco, and Intoxicants (2.38%)

Difference between Consumer Price Index and Wholesale Price Index

Key Issues Associated with India’s Consumer Price Index

• High Food Weight Bias: Food and beverages carry nearly 46% weight in CPI-Combined, making inflation highly sensitive to monsoon shocks, supply disruptions, and food price volatility, often overstating generalized inflation.
  • For instance, in June 2024, a sharp spike in vegetable prices pushed headline CPI above the RBI’s tolerance band, even as core inflation (excluding food and fuel) remained relatively moderate. 
• The “Digital Blindspot”- Invisible Modern Services: Rapid urbanisation and rising digital services consumption are not adequately reflected in CPI, leading to limited representation of urban middle-class inflation pressures.
  • The index excludes the post-2016 digital revolution, ignoring essential modern expenditures like smartphones, 5G data packs, OTT subscriptions, and gig-economy.
    • By failing to track these “new necessities,” the CPI significantly underreports the true cost of living for the average Indian family today, especially in urban areas. 
• Supply-Side Driven Inflation Dominance: CPI inflation in India is frequently driven by supply shocks (food, fuel, logistics) rather than demand, reducing the effectiveness of interest rate–based monetary policy.
  • India imports nearly 85% of its crude oil requirement, making domestic inflation highly vulnerable to global price shocks.
    • For instance, the post-Ukraine war surge in crude prices in 2022 sharply raised fuel and transport costs, feeding into CPI despite subdued domestic demand. 
• Limited Regional Granularity: CPI provides national and broad rural-urban estimates but fails to capture sharp inter-state and city-level price differentials, limiting its usefulness for state-specific policy responses.
  • For instance, food inflation in urban centres such as Bengaluru and Hyderabad surged sharply during the 2022–23 vegetable price shocks, while several eastern and northern states experienced relatively milder price increases, yet CPI reported only an averaged national trend.
    • This masking of inter-state and city-level price stress limits the ability of state governments to design targeted fiscal, tax, or market interventions based on local inflation realities. 
• Disconnect with Wage Inflation: CPI inflation does not always align with wage growth, especially in the informal sector, leading to erosion of real incomes despite moderate headline inflation.
  • For instance, even as headline CPI inflation fell to around 1.3% in December 2025, weak wage growth, reflected in average monthly earnings of about ₹24,400 in urban areas and ₹17,000 in rural areas (PLFS 2023–24) meaning that many informal and low-paid workers continued to face an erosion of real incomes, exposing the disconnect between price stability and livelihood security. 
• Structural Underestimation of Housing Inflation: The CPI Housing index, with a weight of 10.07%, relies heavily on outdated frozen rentals and government housing data instead of reflecting dynamic, market-linked rental trends.
  • It also excludes “imputed rent” for rural households. As a result, the index significantly understates the true cost of living, where real estate cycles substantially erode household purchasing power. 
• Informal Market Issues: Price collection from informal markets makes it difficult to adjust for quality improvements, shrinkflation, and disguised price rises, affecting accuracy.
  • For example, in informal retail markets, packaged food items often experience shrinkflation( ie, reduced quantity at the same price or silent quality downgrades) which are not fully captured in recorded prices.
    • As a result, households face a higher effective cost of living than CPI indicates, leading to an underestimation of real inflation pressures. 

Measures Needed to Strengthen India’s Consumer Price Index

• Rebalancing Excessive Food Weight: With food and beverages accounting for nearly 46% of CPI-Combined, India’s headline inflation remains disproportionately influenced by supply-side shocks.
  • A gradual rebalancing of weights, consistent with Engel’s Law (that states that as a household’s income increases, the percentage of income spent on food decreases, even if the absolute amount spent on food rises) and rising incomes, along with greater emphasis on core inflation for policy signalling, would improve monetary transmission without ignoring food security concerns. 
• Strengthening Regional CPI: India’s CPI framework largely provides national and broad rural–urban indices, masking significant inter-state and intra-urban inflation variations.
  • Expanding the network of price collection centres and publishing state-level and major city-level CPI indices would enable decentralised inflation management and improve Centre–State coordination in addressing region-specific price pressures. 
• Improved Measurement of Housing and Services Inflation: Despite rapid urbanisation, housing and services inflation remains underrepresented in CPI due to limited rental market coverage and methodological constraints.
  • There is a need to better capture urban rental trends, private education fees, healthcare costs, and transport services.  
  • Integrating administrative datasets such as municipal rental records, school fee structures, and insurance premiums, along with strengthening urban price surveys, would align CPI more closely with real cost-of-living conditions. 
• Managing Supply-Side Inflation: A significant portion of CPI volatility in India stems from supply-side factors, which are beyond the immediate control of monetary policy.
  • Such inflation episodes require non-monetary interventions including buffer stock management, calibrated trade policies, logistics improvements, and market reforms.
    • Strengthening institutional coordination between the RBI and line ministries dealing with agriculture, food, and commerce would prevent over-reliance on interest rate tools to address structurally induced price pressures. 
• Unmask Hidden Inflation in Informal Markets: CPI price collection in India relies heavily on informal markets, where quality variation, shrinkflation, and product substitution are common, often leading to understated inflation.
  • Drawing on recommendations from the OECD Manual on CPI Measurement, India needs to adopt hedonic pricing methods and digital price tracking to adjust for quality changes.  
  • Leveraging GST data, e-commerce prices, and scanner data would improve accuracy and ensure CPI reflects real changes in consumer purchasing power rather than nominal price stability. 
• Reducing Seasonal Volatility Through Structural Reforms: Seasonal fluctuations in agricultural prices continue to cause sharp month-to-month volatility in CPI readings, complicating policy responses.
  • The Dalwai Committee on Doubling Farmers’ Income have emphasised investments in cold storage, food processing, post-harvest infrastructure, and market integration through platforms such as e-NAM.  
  • These structural reforms would reduce wastage, smoothen supply chains, and stabilise consumer prices, making CPI a more reliable indicator for macroeconomic management. 

Conclusion

The Consumer Price Index (CPI) is India’s main measure of retail inflation. However, using 2012 as the base year for a long time made it harder for the index to reflect changing consumption habits, rising importance of services, and increasing urban living costs.

Now, the base year is being revised to 2024, using data from the latest Household Consumption Expenditure Survey. This update will make the CPI more accurate by improving how items are represented, how much weight they are given, and what goods and services are included.

With more detailed regional data and better use of core inflation indicators, this change will also help monetary policy work more effectively. Overall, updating the CPI regularly will allow it to better reflect real changes in the cost of living in India’s fast-changing economy.