New Inflation Series: Food Weight Reduced to 37% from 46%
New CPI series reduces food's weight, impacting inflation measurement and policy.
Photo by Markus Winkler
Key Facts
Food weight in CPI: Reduced to 37%
Previous food weight: 46%
Base year for CPI: 2024
UPSC Exam Angles
GS Paper 3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Connects to the syllabus through inflation measurement and its impact on monetary policy.
Potential question types: Statement-based MCQs, analytical questions on the impact of inflation on different sectors.
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Background
The construction of price indices in India has a long history, dating back to the colonial era when the need for measuring the cost of living for different sections of the population was first recognized. Early efforts focused on constructing cost of living indices for industrial workers in major cities. Post-independence, the focus shifted to developing more comprehensive indices like the Wholesale Price Index (WPI) and the Consumer Price Index (CPI).
The CPI, in particular, has undergone several revisions in its base year and methodology to reflect changes in consumption patterns and the availability of new goods and services. These revisions are crucial for ensuring that the inflation figures accurately represent the economic realities faced by households. The evolution of the CPI reflects the ongoing efforts to improve the accuracy and relevance of inflation measurement in India.
Latest Developments
In recent years, there has been increasing scrutiny of the CPI's methodology and its ability to accurately capture the inflationary pressures in the economy. The COVID-19 pandemic and subsequent supply chain disruptions have further highlighted the challenges in measuring inflation, as consumption patterns shifted dramatically and certain goods and services became scarce. The Reserve Bank of India (RBI) has also been actively involved in discussions on improving inflation measurement, as the CPI is a key input for monetary policy decisions.
Looking ahead, there is likely to be continued emphasis on refining the CPI's methodology, incorporating new data sources, and ensuring that it reflects the evolving economic landscape. The adoption of advanced technologies like machine learning could also play a role in improving the accuracy and timeliness of inflation data.
Frequently Asked Questions
1. What are the key facts about the new CPI series for UPSC Prelims?
The new CPI series, with the base year 2024, reduces the weightage of food items from 46% to 37%. This change impacts inflation measurement and potentially influences RBI's monetary policy decisions. Remember the base year and the percentage change in food weightage for the exam.
Exam Tip
Focus on the base year (2024) and the change in food weightage (46% to 37%) for prelims MCQs.
2. What is the Consumer Price Index (CPI) and why is it important?
The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services. It is a key indicator of inflation and is used by the RBI to formulate monetary policy. Changes to the CPI, like the new series, can significantly impact economic assessments.
3. How might the reduced weightage of food in the CPI impact common citizens?
A reduced weightage of food in the CPI could potentially lead to lower reported inflation figures. This might influence the RBI to adjust interest rates, potentially affecting borrowing costs for housing, education, and other loans. However, the actual impact on household budgets will depend on individual spending patterns.
4. Why is the new CPI series with a reduced food weightage in the news recently?
The new CPI series is in the news because it reflects evolving consumption patterns and aims to provide a more accurate representation of household expenditures. The shift from a 46% to 37% food weightage is a significant change that has implications for inflation measurement and monetary policy.
5. What is the historical background of constructing price indices in India?
The construction of price indices in India dates back to the colonial era, when the need for measuring the cost of living for different sections of the population was first recognized. Early efforts focused on constructing cost of living indices for industrial workers in major cities. Post-independence, the focus shifted to developing more comprehensive indices.
6. What are the important dates to remember regarding the new CPI series?
The key date to remember is 2024, which is the base year for the new CPI series. This is crucial for understanding the reference point against which inflation is being measured.
Exam Tip
Remember 2024 as the base year for the new CPI series.
7. What are the recent developments that led to the revision of the CPI series?
Recent developments include increasing scrutiny of the CPI's methodology and its ability to accurately capture inflationary pressures. The COVID-19 pandemic and subsequent supply chain disruptions highlighted the challenges in measuring inflation, as consumption patterns shifted dramatically.
8. What are the pros and cons of reducing the weightage of food in the CPI?
Pros: Potentially more accurate reflection of current consumption patterns. Cons: May underestimate the impact of food price inflation on lower-income households, who spend a larger proportion of their income on food.
9. How does the new CPI series differ from the previous CPI series?
The key difference is the reduced weightage of food items, which has decreased from 46% to 37%. The new series also incorporates updated methodologies and a revised basket of goods and services to better capture current economic realities.
10. What are the key numbers associated with the new CPI series that are important for the exam?
The key numbers to remember are 37% (new food weight in CPI) and 46% (previous food weight in CPI). These figures highlight the magnitude of the change in the index.
Exam Tip
Memorize the percentages: 37% (new food weight) and 46% (old food weight).
Practice Questions (MCQs)
1. Consider the following statements regarding the Consumer Price Index (CPI) in India: 1. The CPI measures the average change in prices paid by urban consumers for a basket of goods and services. 2. The base year for the current CPI series is revised periodically to reflect changing consumption patterns. 3. A decrease in the weightage of food items in the CPI basket necessarily implies a decrease in overall inflation. Which of the statements given above is/are correct?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: A
Statement 1 is CORRECT: The CPI measures the average change in prices paid by urban AND rural consumers, not just urban. Statement 2 is CORRECT: The base year is revised to reflect changing consumption patterns. Statement 3 is INCORRECT: A decrease in food weightage doesn't necessarily mean lower inflation; it depends on the price changes of other items in the basket. If non-food prices rise sharply, overall inflation could still increase.
2. With reference to the recent changes in the Consumer Price Index (CPI) series, consider the following statements: 1. The weightage of food items in the CPI has been increased to reflect higher food consumption. 2. The new CPI series aims to provide a more accurate representation of household expenditures. 3. The Reserve Bank of India (RBI) is likely to disregard the new CPI series in its monetary policy decisions. Which of the statements given above is/are NOT correct?
- A.1 and 2 only
- B.1 and 3 only
- C.2 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Statement 1 is INCORRECT: The weightage of food items has been REDUCED, not increased. Statement 2 is CORRECT: The new series aims for a more accurate representation. Statement 3 is INCORRECT: The RBI is likely to use the new CPI series, as it is a key indicator for monetary policy.
3. Assertion (A): A reduction in the weightage of food items in the Consumer Price Index (CPI) can lead to lower overall inflation figures. Reason (R): Food prices are often more volatile than the prices of other goods and services in the CPI basket. In the context of the above, which of the following is correct?
- A.Both A and R are true, and R is the correct explanation of A
- B.Both A and R are true, but R is NOT the correct explanation of A
- C.A is true, but R is false
- D.A is false, but R is true
Show Answer
Answer: A
Both A and R are true, and R is the correct explanation of A. Reducing the weightage of volatile food prices can indeed lead to lower overall inflation figures, as food price fluctuations have a smaller impact on the overall index.