New CPI Series to Reduce Inflation Volatility, Improve Policy Focus: CEA
Chief Economic Advisor V Anantha Nageswaran announced on Thursday that the revised Consumer Price Index (CPI) series, featuring a lower weightage for food and beverages, is expected to make overall inflation less volatile. This structural change will enable monetary policy responses to concentrate more on aggregate demand pressures rather than addressing supply-induced inflation spikes.
Enhanced Policy Calibration with Updated Data
Nageswaran emphasized that the updated CPI data, which mirrors current consumption patterns and economic conditions, will facilitate better calibration of both monetary and fiscal policies. By reducing the influence of volatile food items, policymakers can achieve more stable and predictable economic management.
Policy Implications and Predictability
Highlighting the broader policy implications, the CEA indicated that lower inflation volatility could lead to improved predictability of the government's Budget. Additionally, it will aid in assessing inflation expectations among households and businesses, providing a clearer economic outlook.
"The new CPI series now provides policymakers with a more up-to-date basis for assessing real incomes, consumption trends, and purchasing power," stated Nageswaran, underscoring the enhanced accuracy of economic measurements.
Shift in Consumption Patterns
The weightage of food and beverages in the new CPI series has been reduced to approximately 37% from 46% previously. According to Nageswaran, this adjustment reflects a progressive diversification of expenditure towards essential services such as health, education, mobility, and connectivity.
"The revised basket also highlights the increasing role of services in consumption. This brings consumption measurement closer to the evolving structure of output and employment, where services account for a rising share of economic activity," he explained. The new series also acknowledges the growing influence of digital channels in price formation, aligning with modern economic dynamics.
Improved Measurement and Welfare Targeting
Nageswaran further noted that the updated CPI series captures housing costs more accurately, leading to a better measurement of the rural cost of living and reducing urban bias in inflation estimation. This enhancement ensures that poverty estimates become more precise, as real consumption and income calculations directly depend on CPI data.
"Improved cost of living measurement enhances the targeting efficiency of welfare schemes, ensuring that benefits and subsidies are better aligned with actual regional price realities," he added, highlighting the practical benefits for social welfare programs.
