Inflation may rise under new CPI series limiting scope for monetary easing: Economists

Retail inflation is likely to rise in the economy due to the alteration in weightage assigned to basket of commodities, leading to limited scope for monetary easing by the Reserve Bank of India (RBI) this year. 

The 2024 series for calculation of Consumer Price Index (CPI) based inflation has lowered the weightage of food items to 36.8%, compared with 46% earlier. And since the food prices are largely benign, headline inflation rate may rise under the new series. 

Retail inflation stood at 2.75% in January under the newly launched All India Consumer Price Index (CPI) series, with 2024 as the base year, according to data released by the National Statistics Office (NSO) under the Ministry of Statistics and Programme Implementation on Thursday. This compares with inflation rate of 1.33% in December and 0.71% in November. 

"Given the composition of the index and the dilution of the base effect for food items, we may expect inflation to climb upwards in the coming months," said Madan Sabnavis, chief economist, Bank of Baroda. 

"This would mean a long pause from the point of view of the RBI on rates. There may not be too much of alteration in the inflation forecasts by the RBI for next year," he added. 

"We do not expect the new inflation series to materially influence policy in the near term. An extended rate pause looks likely, underpinned by a cyclical upturn in both growth and inflation and improving confidence following the conclusion of the US–India trade negotiations," said Madhavi Arora, chief economist, Emkay Global Financial Services. 

New CPI series expands coverage of goods and services

Consumption basket to better reflect current spending patterns under the new series. The number of goods covered has increased from 259 to 308, while services have risen from 40 to 50. 

The updated index incorporates several new items, including rural housing, online media or streaming services, value-added dairy products, barley and its products, pen drives and external hard disks, attendants and babysitters, and exercise equipment. 

Govt to include e-commerce, OTT, and rail fare spending in inflation

Additionally, the government will also track expenditure by households on e-commerce, OTT platforms and rail fares, among others to calculate retail inflation under the new series. The data sets will be collected via computer assisted interviewing. 

"As part of the base updation exercise, the CPI 2024 series marks the introduction of Computer Assisted Personal Interviewing (CAPI) for price data collection. Under CAPI, price data are collected electronically using handheld devices with in-built validation checks, standardised item specifications, and real-time monitoring capabilities," said a release from the ministry of statistics and programme implementation. 

"The transition to CAPI enhances data quality, timeliness and consistency. Physical market price collection continues to form the backbone of CPI compilation," it said.