India’s new CPI explained

In today’s Finshots, we explain why the government has changed how we view inflation in India.

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The Story

Every year we are told about the consumer inflation rate, and on paper it doesn’t look that high. But for people who actually pay bills, buy groceries, and go about their daily lives, it often feels like their wallets are getting lighter year after year.

Rent keeps going up, school fees rarely stay the same as last year, health care costs don’t go down and small monthly expenses quietly add up.

This disconnect is not just psychological. It is structural. Inflation is not simply about prices rising; it’s about which prices matter more than others. So when the government says that inflation is X%, that number is constructed using the Consumer Price Index, or CPI. In simple terms, CPI is a weighted average of what households spend their money on. The more a household spends on a category, the more price changes in that category are meant to affect the final inflation number.

But here’s the thing. For years, India has measured inflation using a framework anchored to spending habits since 2012. Back then, food took up a much larger share of household budgets, items like DVD players and second-hand clothes were still relevant, and services played a much smaller role.

Over the past decade, that balance has shifted sharply. Households now spend much more on rent, transportation, education, health care, and a growing list of services that barely existed before. But inflation measurement still reflected the structure of the 2012 economy.

As consumption patterns have evolved, the framework has not kept pace. That’s also why inflation has often felt understated. Food prices may have cooled and dragged down headline inflation, even as rent, school fees and medical bills continued to rise in the background. So yes, inflation was not misreported. It just didn’t fully reflect today’s spending reality.

Now to be honest, measuring inflation is not easy. Consumption patterns change faster than statistical systems do. But over time, the mismatch became too great to ignore. Therefore, the old inflation framework itself had to be replaced.

That replacement arrived in early 2026.

In February, India began publishing inflation data using a new CPI series built on 2024 consumption patterns. This means that 2024 is now the base year for measuring inflation, replacing 2012 as the reference point.

But what does a base year mean and why does it matter?

Well, base years matter because they define what “normal” spending looks like. Inflation is always measured relative to this base. If the base reflects an outdated economy, inflation begins to tell an outdated story. By anchoring CPI to the Household Consumption Expenditure Survey of 2023–2024, India now measures price changes by how households actually spend today, not how they spent more than a decade ago.

In simpler terms, the new CPI doesn’t just track how prices change. It follows how prices change for the things that now make up everyday life.

This shift is also visible in the consumption basket itself. Obsolete items from a bygone era such as VCRs, DVD players, cassettes, tape recorders and second-hand clothes have been removed. In their place came expenses associated with modern households: streaming services, rural housing, value-added dairy products, digital storage devices, babysitters and other services.

The basket also became wider. The number of goods items increased from 259 to 308, while services expanded from 40 to 50 items, pushing the total basket up from 299 to 358. But updating the cart is only part of the story. What really determines how inflation behaves are weights or how much importance each category carries in the final number.

Under the older framework, food dominated inflation because it made up a much larger share of household spending. But today, households spend relatively less on food and more on housing, transportation, health care, education and services. The new CPI reflects this shift by rebalancing weights using the latest expenditure data, which changes which price movements affect inflation the most.

However, one of the most consequential and least discussed changes in the new CPI is India’s shift to the COICOP-2018 classification system. Previously, inflation was measured using only six broad consumption groups, many of which aggregated many different expenditures. But under the new framework, CPI is organized into 12 clearly defined sections, according to international standards used by most major economies.

Sidebar: COICOP It sounds complicated, but the idea behind it is simple. It stands for classification of individual consumption by purpose – which is a long way of saying, let’s organize spending according to what people actually pay for. Rent stays with rent. Hospital bills stay with healthcare. School fees stay with education. This is how most countries measure inflation.

And this is not merely a cosmetic change. Instead of burying services within broad categories, it gives clear visibility to specific expenses. If a category eats significantly into household income, it now has a clear place in the inflation calculation. For ordinary households, this means that recurring monthly costs such as rent, school fees or hospital bills can hardly be statistically diluted.

There is also a quiet global interest. International institutions have struggled for years to compare India’s inflation with the rest of the world because the underlying classification is not consistent with the rest of the world. By adopting COICOP, India now measures inflation using the same framework as other major economies. Thus comparisons become cleaner.

The simplest way to think about COICOP is that it changes which prices are taken seriously. Inflation may never perfectly match every household’s experience, but the new framework brings it closer to real life. And when inflation is measured more honestly, policy responses—from interest rates to cost-of-living adjustments—have a better chance of landing where it matters most.

What has changed now is not only what people spend, but how and where they spend it. We are talking about online and retail. Sure, the old CPI had price data collected from the on-the-ground visits to the markets, but it was limited. But CPI today is built by combining market visits with digital tools, online prices and official records, to reflect how people shop and pay, not how they used to.

That’s how it works in theory.

But what does this actually mean for the inflation number you see each month?

Inflation may start to behave a little differently. Sudden increases in food prices may not cause the headline number to swing as wildly as before, while slow, steady increases in rent, health care, education and services matter more. Inflation can feel less bouncy from month to month, but more familiar. Seen through this new approach, India’s latest inflation readings are 2.73% in rural areas and 2.77% in urban areas.

This still does not mean that inflation will perfectly suit everyone’s wallet. It probably never can. A household that pays school fees and rent will experience inflation very differently than one that spends more on groceries or fuel.

But what has changed is how we measure it. By updating the base year, refreshing the basket, rebalancing weights, adopting global standards and modernizing how prices are tracked, India has rebuilt the way it measures inflation to reflect everyday life.

So the next time you hear that inflation is “under control” but your expenses say otherwise, remember that prices didn’t suddenly change overnight. But the way we measure them ultimately has.

Until then…

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