New Delhi, August 7 2024 : An Indian government panel is contemplating a significant reduction in the food weighting of the Consumer Price Index (CPI) by up to 8 percentage points. This move aims to mitigate inflation spikes and align the CPI more accurately with current consumer spending patterns, which are based on outdated 2011-2012 data.
The panel, operating under the Ministry of Statistics and Program Implementation, is discussing reducing the food and beverage category’s weight from the current 54.2% of the CPI basket. This proposal could help curb inflation, which has been significantly influenced by food prices.
Key Points:
Current Situation: The CPI is based on 2011-2012 consumer spending patterns. Economists believe this outdated data distorts the official inflation figures, which the central bank uses to set interest rates. Recent surveys indicate consumers are spending less on food than a decade ago. Bloomberg Economics estimates that June’s inflation was 70 basis points higher than it would have been with updated weights.
Inflation Data: In June, food prices increased by 9.36% year-on-year, raising the headline inflation rate to 5.08%. Excluding food and energy, inflation was 3.15%.
Proposed Changes: The CPI basket, currently including 299 items, may see redundant items like horse cart fares and video cassette prices removed. The panel is also considering adding modern consumer electronics, such as smartphones.
Implementation Timeline:
Process: The proposed changes are expected to be finalized and implemented by January 2026. The revisions will be based on new consumer spending surveys, with the entire process slated for completion by 2025.
Official Response: A spokesperson for the Ministry of Statistics and Program Implementation did not immediately respond to requests for further information.
India’s Chief Economic Adviser, V. Anantha Nageswaran, recently suggested that the central bank’s inflation target should exclude food. However, several economists argue that removing food from the CPI target is not suitable for a country like India, where food is a significant driver of inflation. The Reserve Bank of India (RBI) has maintained a relatively hawkish stance, keeping interest rates unchanged for over a year due to inflation being above its 4% target. Economists predict the RBI will likely hold rates again in the upcoming meeting on Thursday.
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