Скачать или смотреть Why India’s Inflation Numbers Are Wrong | CPI Needs Urgent Update | Editorial Breakdown

Inflation numbers often shape public sentiment, government policy, and the Reserve Bank of India’s next big move. But what happens when the tool used to measure inflation itself is flawed?

Context:
The October 2025 retail inflation rate dropped to 0.25%, the lowest in over a decade. But instead of relief, economists see a red flag: the fall is artificial, caused by base effects and outdated CPI weightages, especially the overweight on food.

Background

Consumer Price Index (CPI) is India’s key inflation indicator.

The base year is 2012, making the CPI basket outdated and inaccurate.

RBI’s Monetary Policy Committee (MPC) uses CPI as its benchmark for interest-rate decisions.

The economy has shifted dramatically since 2012 (urbanisation, digital services, rising healthcare costs, new consumption patterns).

Main News Overview

October 2025 CPI inflation: 0.25%, the lowest since 2012.

Food inflation: –3.7%, the largest fall ever in the current CPI series.

But this fall is NOT real — it is a base effect illusion caused by last year’s high inflation (9.7%).

Meanwhile, housing, fuel, tobacco and services have seen higher inflation than last year.

Detailed Analysis
1. The CPI basket is outdated and misleading

Food & beverages have 46% weight in the CPI.

This exaggerates the effect of base-driven distortions.

Real-world prices of vegetables and essentials have risen, but CPI shows deflation.

2. Major sectors tell a different story

Fuel & light → higher inflation

Housing → higher inflation

Tobacco → higher inflation

Miscellaneous (services) → higher inflation

Clothing & footwear → only major category showing GST-linked decline

This indicates CPI is hiding true inflation pressures.

3. Big gap between measured inflation and public experience

RBI consumer survey (Sept 2025):
Perceived inflation = 7.4%

Official CPI = 0.25%

This credibility gap undermines public trust and policy accuracy.

4. Why this is dangerous for policymaking

RBI’s MPC uses CPI to decide:

Whether to cut rates

Whether inflation is easing or rising

How to manage liquidity and credit growth

If the CPI is wrong:

RBI’s decisions may misfire

Growth data gets muddied

Rate cuts may happen at the wrong time

Conclusion / Solution Explanation

India urgently needs:

A. New CPI Series

Updated consumption basket

Revised weightages

New base year (2022 or later)

B. More accurate representation of:

Urban services

Healthcare

Digital economy

Housing costs

Education

Transport and communication

C. Better statistical transparency

To avoid policy errors, the CPI must reflect real inflation, not statistical illusions.

Mains Practice Questions

Critically examine the limitations of India’s current Consumer Price Index and its implications for monetary policy.

Discuss the role of base effects in inflation measurement and how they can distort policymaking during transitional economic periods.

Why is updating the CPI basket essential for accurate measurement of living costs in a rapidly changing economy?

MCQs (with detailed explanation)
Q1. The base year for India’s current CPI (Combined) is:

A) 2004-05
B) 2011-12
C) 2017-18
D) 2020-21
✔ Answer: B
Why: Current CPI uses 2012 as the base, urgently due for an update.
Why not others: Options A, C, D correspond to older or proposed updates, not current.

Q2. Food & beverages category accounts for nearly what share of the CPI?

A) 20%
B) 30%
C) 46%
D) 60%
✔ Answer: C
Reason: CPI disproportionately weights food, causing distortions.

Q3. Base effect refers to:

A) Changes in GDP base year
B) Impact of last year’s high/low prices on current inflation rates
C) Errors in data collection
D) Weighted index compiling
✔ Answer: B
Why not others: Incorrect definitions; base effect specifically relates to comparison distortions.

Q4. Which institution uses CPI to set repo rate decisions?

A) SEBI
B) NITI Aayog
C) Monetary Policy Committee (RBI)
D) Finance Commission
✔ Answer: C

Q5. Per RBI’s September survey, perceived inflation among households was:

A) 0.25%
B) 3.2%
C) 7.4%
D) 12%
✔ Answer: C
Why: Shows major gap between official CPI and public experience.
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