Rebasing CPI necessary for better inflation targeting: RBI paper

The government needs to expedite its work on the revised consumer price index (CPI) which may help the central bank manage inflation expectations better as the published indices are divergent from market prices due to the 2012 base in the current series.

The current index is derived from the consumption expenditure survey (CES) conducted during 2011-2012, long before inflation targeting was adopted as a formal monetary policy objective.

"Efforts to conduct new CES for rebasing CPI to a recent period may be expedited to make the CPI consumption basket relevant to the present consumption behaviour," said a research paper by the central bank economists.


The present method of CPI compilation in India involves the aggregation of CPI across rural and urban sectors, and states and union territories.

"This method of aggregation at times creates challenges for use of the index for monetary policy since the inflation based on it reflects, in addition to changes in retail prices of goods and services, data kinks that emanate from the aggregation methodology," Praggya Das and Asish Thomas George, from the RBI's monetary policy department, wrote in a research paper published in the central bank's latest monthly bulletin.

The views, however, are not that of the central bank. The authors cite the instances of the January and February 2023 CPI prints are the latest examples to make their point on the divergence in published and those derived by the users.

Following the release of the January 2023 provisional CPI print (on February 13, 2023) by NSO, there was considerable debate on the aggregation methodology followed in CPI as a result of a large divergence in the headline CPI inflation published by the NSO over that of a derived overall CPI inflation that users computed from a weighted aggregation of the CPI item level data. The debate continued even after the publication of the February CPI data on March 13, 2023.

The authors point out that the divergence has widened since 2021, and the published headline inflation was systematically lower than the user-derived inflation due to low published fuel group inflation (compared to the derived fuel inflation).

In January and February 2023, the divergence in CPI fuel group inflation persisted, but its impact was offset by substantially higher published cereal inflation (compared to the derived cereal inflation), resulting in higher overall published inflation than that derived by vertical aggregation of items, they said.

The current CPI base of 2012 is derived from the consumption expenditure survey (CES) conducted during 2011-2012. The market survey to identify shops for collecting prices is even older. "Timely base revision with synchronous CES, price and market survey every five years can address policy maker's concerns," conclude the authors. This assumes significance as the central bank is grappling to manage inflation which has consistently remained above the target band of 2-6% for almost a year now

Inflation target mandates for the monetary policy are generally defined in terms of CPI and as such high quality CPIs are critical for effective monetary policymaking.