Inflation & Price Indices — CPI, WPI, Inflation Targeting

Introduction

Inflation — the sustained rise in the general price level — is one of the most closely watched macroeconomic variables. It erodes purchasing power, distorts savings and investment decisions, and disproportionately harms the poor. India's inflation architecture involves multiple price indices, a formal inflation targeting framework, and an institutional mechanism (the Monetary Policy Committee) to keep inflation within bounds. This topic is examined in both Prelims (data-based) and Mains (policy analysis) under GS3 Economy.

Consumer Price Index (CPI)

The CPI measures changes in the average retail prices of a basket of goods and services that households typically consume. It is compiled by the Ministry of Statistics and Programme Implementation (MoSPI).

CPI Components and Weightage (Base Year: 2012=100)

The CPI (Combined) basket uses the following group weights:

Food & beverages carry the highest weight at nearly 46%, which means food price shocks strongly influence headline CPI. This is why vegetable price spikes and poor monsoon seasons have an outsized effect on India's measured inflation.

Current Series: A new CPI series with base year 2024=100 was released by MoSPI on 12 February 2026 (with January 2026 inflation reading of 2.75% as the first release on the new base). The basket was expanded to 358 weighted items (from 299) using HCES 2023-24, with classification updated to COICOP 2018. Average CPI for FY 2024-25 was 4.6% (a six-year low) and February 2026 CPI was 3.21% (rural 3.37%, urban 3.02%) — initial readings under the new base year. The food and beverages weight has reduced from ~46% (old 2012 base) to approximately 37% (new 2024 base).

Types of CPI

CPI (Combined) is the measure used for India's inflation targeting framework under the RBI Act.

Wholesale Price Index (WPI)

The WPI measures price changes at the wholesale/producer level — before goods reach consumers. It is compiled by the Office of the Economic Adviser, Ministry of Commerce and Industry.

WPI Components and Weightage (Base Year: 2011-12=100)

Within Manufactured Products, the largest sub-groups are: Basic Metals (9.7%), Food Products (9.1%), Chemicals & Chemical Products (6.5%), Textiles (4.9%).

CPI vs WPI: Key Differences

GDP Deflator

• Measures average price change across all goods and services in the economy — the broadest price index
• = (Nominal GDP / Real GDP) × 100
• Covers both tradeable and non-tradeable sectors
• Not released monthly; derived from national accounts data
• Not used for inflation targeting but is important for understanding real vs nominal growth

Headline vs Core Inflation

The gap between headline and core inflation is important for monetary policy — if food prices spike but core remains low, the RBI may look through the headline shock rather than aggressively tightening.

India's Flexible Inflation Targeting Framework

Legislative Basis

The RBI Act, 1934 was amended in 2016 to formally mandate inflation targeting. Key provisions:

• Section 45ZA: Central government, in consultation with RBI, shall determine the inflation target every 5 years
• Section 45ZB: Constitutes the Monetary Policy Committee (MPC) to set the policy rate to achieve the target
• Section 45ZC: MPC members' qualifications and appointment process
• Section 45ZL: MPC must publish minutes (with individual votes) within 14 days of each meeting (Section 45ZI deals with quorum and decisions; Section 45ZN governs the failure-report obligation when inflation breaches the target band for 3 consecutive quarters)

Inflation Target

Monetary Policy Committee (MPC)

• Constituted: October 2016 (first meeting)
• Composition: 6 members — 3 RBI officials (including the Governor as Chairperson) + 3 external members appointed by the Central Government
• Decision-making: Simple majority; Governor has a casting vote in case of a tie
• Meetings: Minimum 4 times a year; meets every two months in practice
• Instrument: Sets the Repo Rate (key policy rate) — the rate at which RBI lends overnight to commercial banks

RBI Tools to Control Inflation

Causes of Inflation in India

Recent Inflation Trends in India (2024–2026)

RBI's revised inflation forecast for FY 2025-26: 2.6% (revised down from 3.1% earlier in the year).

RBI Rate Actions (2025): RBI reduced the repo rate by cumulative 125 basis points via four cuts in 2025 (Feb 25bps, Apr 25bps, Jun 50bps, Dec 25bps), bringing the rate from 6.50% to 5.25%, as easing inflation created space to support economic growth. The April 2026 MPC held the rate unchanged at 5.25%. Governor: Sanjay Malhotra (appointed December 2024).

Food Inflation — Structural Challenges

Food inflation is India's most persistent inflation challenge because:

• Food has a ~46% weight in CPI — any supply shock immediately shows in headline
• Perishables (vegetables, fruits) are highly price-volatile due to seasonal production cycles
• India lacks a robust cold chain and post-harvest infrastructure — large wastage amplifies supply shocks
• APMC (Agricultural Produce Market Committee) fragmentation raises intermediary costs
• Global edible oil and pulses prices pass through into domestic prices due to high import dependence

Recent Developments (2024–2026)

CPI Inflation at 6-Year Low — 4.6% Average in FY25, 3.21% in Feb 2026

India's CPI inflation averaged 4.6% in FY 2024-25 — the lowest in six years — after peaking at 7.4% in September 2023 due to vegetable price spikes. The moderation was driven by a sharp correction in food prices in H2 FY25: vegetable prices fell approximately 35% in early 2025, easing pressure on the food component (which holds ~46% weight in the CPI basket). By February 2026, CPI fell further to 3.21% — well within the RBI's 2–6% tolerance band, and close to the lower end.

WPI (Wholesale Price Index) inflation also moderated, averaging approximately 2.3% in FY 2024-25 (compared to -0.7% in FY 2023-24 when it was briefly deflationary due to commodity price corrections). The divergence between WPI and CPI reflects the services component in CPI and the supply-chain dynamics in goods markets. Core CPI (excluding food and fuel) remained sticky around 3.5–4.0%, suggesting underlying demand-side inflationary pressures in services and manufactured goods.

UPSC angle: CPI at 4.6% average (FY25) and 3.21% (Feb 2026), the distinction between food/headline/core inflation, and the "Tomato-Onion-Potato (TOP) problem" in India's inflation management are classic UPSC Prelims and Mains discussion points.

RBI's Inflation Targeting Framework — 4% Target, 2025 Rate Cuts

The RBI's Flexible Inflation Targeting (FIT) framework — adopted under the amended RBI Act 2016, with CPI target of 4% ± 2% — worked effectively in FY25. With CPI consistently within the band and approaching 4%, the MPC initiated a rate-cutting cycle: 4 cuts of 125 bps total in 2025, bringing the repo rate from 6.50% (February 2025) to 5.25% (December 2025). The MPC adopted a "neutral" stance from June 2025, signalling data-dependent decisions.

The FIT framework's five-year review — mandatory under the amended RBI Act — was completed in early 2026, with the Government of India reaffirming the 4% CPI target and ±2% tolerance band for the period 1 April 2026 to 31 March 2031. This provides macroeconomic certainty for monetary policy planning. Governor Sanjay Malhotra (appointed December 2024, succeeding Shaktikanta Das) led the rate-cutting cycle.

UPSC angle: RBI Governor (Sanjay Malhotra, from December 2024), the repo rate trajectory (6.50% → 5.25% via four cuts in 2025), and the FIT framework five-year review outcome are current affairs overlaps with the monetary policy chapter.

New CPI Series (Base Year 2024) — Methodological Revision Underway

MoSPI released a new CPI series with base year 2024=100 on 12 February 2026 — the first release covered January 2026 inflation (2.75% YoY). The food and beverages weight was reduced from approximately 46% (old 2012 base) to around 37% (new 2024 base), reflecting updated household expenditure surveys (HCES 2023-24). Other changes: basket expanded from 299 to 358 weighted items; classification updated to COICOP 2018; increased weights for housing, healthcare, and education in line with changed spending patterns. The new series also incorporates more granular urban and rural baskets.

This revision is significant because: (1) a lower food weight reduces the headline CPI impact of vegetable/cereal price shocks; (2) the new weights show a different inflation trend than the previous series; and (3) the RBI's 4% target is framed in terms of CPI — the base year change affects monetary policy calibration.

UPSC angle: The CPI base year revision (2024, reducing food weight to ~37%, effective February 2026) and its implications for inflation measurement and monetary policy are high-priority Prelims 2026 facts. The HCES 2023-24 as the underlying data source and COICOP 2018 classification are also important.

IIP Growth — Manufacturing PMI Above 55, Eight Core Industries Mixed

India's IIP growth for FY 2024-25 was approximately 4% (compared to 5.8% in FY 2023-24), reflecting a slowdown in capital goods production in H1 and recovery in H2. India's Manufacturing PMI averaged above 57 in several months — among the highest globally — driven by new orders, production expansion, and input cost control. Services PMI remained above 60 in multiple months, indicating strong expansion in the tertiary sector.

Among the Eight Core Industries (constituting 40.27% of IIP), coal production grew strongly (+8.9%); electricity generation was robust; but crude oil production declined (-2.6%) due to ageing oilfields; and refinery products showed modest growth. Cement and steel production tracked infrastructure capex closely, growing in line with government construction activity.

UPSC angle: IIP growth (~4% FY25), the strong PMI readings (above 55-57), and the specific core industry trends (coal +, crude oil -) are data points tested in both Prelims (current year IIP growth) and Mains (structural manufacturing vs services debate).

Exam Strategy

For Prelims: Know CPI food weight (~37% under new 2024 base; ~46% under old 2012 base), WPI manufactured weight (64.23%), inflation target (4% ± 2%), MPC composition (6 members — 3 RBI + 3 external), RBI Act sections (45ZA, 45ZB), and current mandate period (1 April 2026 – 31 March 2031). New CPI 2024=100 base released 12 February 2026 (replacing old 2012=100 series). SDR valuation basket unrelated to inflation — don't confuse with CPI basket.

For Mains (GS3): Common question formats — evaluate India's inflation targeting framework; analyse causes of food inflation and structural reforms needed; distinguish CPI vs WPI trends and their policy implications. Key arguments: FIT improved RBI credibility and anchored expectations; food inflation requires supply-side, not just monetary, solutions; core vs headline distinction important for nuanced monetary policy.

Key Data Points:

• CPI food & beverages weight: 45.86%
• WPI manufactured products weight: 64.23%
• Inflation target: 4% ± 2% (mandate renewed to 31 March 2031)
• MPC: 6 members; repo rate cut to 5.25% (125 bps cumulatively — 4 cuts in 2025: Feb+Apr+Jun+Dec)
• FY 2025-26 CPI inflation forecast: 2.6% (RBI revised down)
• Food inflation: turned negative in December 2025 (–2.71%)