CPI base revision reflects both methodological rigour, practical relevance

MoSPI's revised CPI modernises price collection, updates weights and aligns with global standards, reshaping how inflation trends are measured and interpreted

The Ministry of Statistics and Programme Implementation (MoSPI) will soon be releasing a new series of Consumer Price Index (CPI) on a revised base year of 2024. The CPI base revision goes well beyond a routine statistical exercise. It is a fundamental rebuilding of the index, undertaken to ensure that inflation measurement remains aligned with evolving consumption patterns, market structures, and improvements in data availability. Understanding this process is therefore essential to correctly interpret movements in inflation and the signals they provide for policy and the broader economy.

 

The price collection system has been expanded and modernised in the CPI 2024 series to capture a more comprehensive and accurate picture of price movements. For better representation of price movements across diverse rural, urban, and online markets, the number of markets has been increased in both rural and urban areas and, for the first-time, prices are being captured through 12 online markets in select towns. Online data is also collected for telecom, OTT (over-the-top platform subscriptions), and airfare. Additionally, centralised price collection is being followed for fuel, rail and postal charges.

 

The number of service items in CPI has been increased from 40 in 2012 to 50 in 2024. This expanded coverage, reflecting rising household consumption of services, will provide a more realistic measure of inflation.

 

The CPI uses a base year as a benchmark to compare prices and measure inflation over time. In the updated framework, the base year has been updated to 2024, reflecting current price levels and consumption behaviour. The collection of base prices in 2024 ensures that future price movements are benchmarked against a more recent and relevant reference period.

 

At the core of this revision is  the adjustment of weights of items in the consumption basket so the index matches how households actually spend their money. In the new series, this recalibration is based on the findings of the Household Consumption Expenditure Survey (HCES) 2023-24, which captured contemporary consumption patterns across rural and urban households. As a result, the item basket and their corresponding weights have been realigned to better represent actual household expenditure.

 

A significant improvement in the revised CPI series is the adoption of the international Classification of Individual Consumption by Purpose (COICOP) 2018 framework for grouping household consumption expenditures on goods and services. However, as the items in HCES 2023-24 were not classified under the COICOP 2018 framework, they have been split and grouped to align with this international classification system. Accordingly, a direct comparison between the CPI 2024 weighting diagram and the expenditure shares of HCES 2023-24 is not advisable.

 

While COICOP aligns India’s CPI with global standards, it has also influenced weights assigned to certain items due to reclassification. For instance, after reclassification in accordance with COICOP, the effective reduction in the weight of food and beverages is 36.75 per cent under the new CPI, from 42.62  per cent in CPI 2012. If the old classification system were followed, the share of food and beverages would have declined broadly from 45.86 per cent to 40.1 per cent. So, the observed reduction is driven both by reclassification and evolving consumption patterns. Similarly, the weight of education services is 3.3 per cent because books and stationery are now classified separately as per COICOP and including them raises the total education-related share to 4 per cent.

 

The new CPI series also updates the coverage of other significant household expenditures. Notably, it provides exhaustive coverage of education-related costs across all levels — primary, secondary, and higher education — and now includes private tuition, coaching centres, and other professional and educational expenses such as library charges and web-based training fees.

 

In house rent, the coverage has been expanded from only urban areas to both urban and rural areas. The addition of rural housing in the CPI 2024 series makes the housing index more holistic and representative and will reflect inflation experienced by all households, not just urban ones. Employer-provided accommodation is excluded to reduce extreme values and improve data consistency.

 

Health inflation in the CPI 2024 framework is also estimated using a structured basket comprising 13 weighted sub-groups derived from 33 representative priced items. The index is designed to capture price variations across a broad spectrum of healthcare services and medical goods and accounts for variations in diagnostic and screening service costs by tracking price movements in key pathological and radiological investigations, thereby, strengthening the measurement of outpatient and preventive healthcare expenditure. By capturing a wider range of medical services, goods and diagnostics, CPI 2024 makes health inflation more comprehensive, reflecting the true picture of healthcare costs on households.

 

MoSPI’s recent updates to the CPI mark a significant step towards modernisation and international alignment. Importantly, these updates were shaped through a collaborative and transparent process, with extensive stakeholder engagement, and the suggestions provided by stakeholders were actively incorporated, ensuring that the CPI reflects both methodological rigour and practical relevance.   

The author is secretary, Ministry of Statistics and Programme Implementation. Views are personal