The October retail inflation (CPI) fell to 0.25%, the lowest since January 2012. However, the decline is attributed to a statistical anomaly rather than an actual fall in prices, highlighting the urgent need to update the CPI series, whose base year remains 2012.

Reason for the Sharp Decline

• High Base Effect: 
  • Food inflation in October 2024 was exceptionally high (~9.7%), creating a favourable base that mechanically pushed the year-on-year food inflation into negative this year.
  • This anomaly significantly dragged down overall CPI because of the large weight of food (~46%) in the basket.
• Impact of GST Rate Reductions:
  • Recent GST rate cuts reduced prices of several goods, especially in clothing and footwear, contributing to softer inflation.

About Consumer Price Index (CPI)

• CPI measures the change in the retail prices of a representative basket of goods and services consumed by households over time.
• Published By: National Statistical Office (NSO) under the Ministry of Statistics & Programme Implementation (MoSPI).
• Frequency: CPI is released monthly.
• Base Year: The current reference base year is 2012.
• CPI basket: The comprehensive basket comprises 299 specific items.
• Components: Consumer Price Index has 6 main components with differing weights 
  • Food and beverages (~46% weight)
  • Pan, tobacco, and intoxicants (2.38%)
  • Clothing and footwear(6.53%) 
  • Housing  (10.07%)
  • Fuel and light (6.84%)
  • Miscellaneous (services such as education, health care etc.) (28.32%)
• Types: 
  • CPI for Industrial Workers (CPI-IW): Compiled by the Labor Bureau.
  • CPI for Agricultural Labourers (CPI-AL): Compiled by the Labor Bureau.
  • CPI for Rural Laborers (CPI-RL): Compiled by the Labor Bureau, it reflects price movements specifically for rural laborers.
  • CPI Combined: Compiled by the NSO.

Significance of CPI

• Primary Inflation Gauge: It serves as India’s main measure of retail inflation, capturing changes in consumer prices across urban and rural India.
• Monetary Policy Anchor: Acts as the nominal anchor for RBI’s inflation-targeting framework (4% ± 2%), guiding interest-rate decisions.
• Indexation Tool: It is used for indexation such as Dearness Allowance (DA) for government employees and various social-sector transfers.
• Real Sector Analysis: It helps deflate national accounts to derive real GDP and other real economic indicators.

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Need for the Urgent Update

• Outdated Consumption Basket: CPI is built on the 2012 consumption basket, which no longer reflects current household spending (digital services, new goods, higher urbanisation).
• Misleading Inflation Weights: Stale weights can distort inflation readings, particularly food inflation, due to base-effect anomalies.
• Policy Accuracy Risk: Since RBI’s Monetary Policy Committee uses CPI to set interest rates, inaccurate inflation numbers risk policy misjudgment, affecting growth, credit, and financial stability.

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