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Inflation Targeting Under Review as Govt Works on New CPI Base
CPI: Changes to the CPI calculation methodology and softening food prices are expected to lower inflation in 2026. A new CPI series is expected to be released in February.
To curb the retail level inflation, the government is set to alter the method for calculating inflation based on the Consumer Price Index (CPI) inflation measure and reform the monetary policy. The easing of food prices, along with the reduction in GST rates, have led to relief on account of inflation this year. If the CPI-based inflation is held at 2%-6%, the RBI may reduce the repo rate further.
Besides the moderation in the prices of food, the government’s move in cutting the rates of GST for 400 products in September has also helped in the price scenario. Additionally, the Wholesale Price Index (WPI) also manifests signs of easing flows of inflation in 2025. A positive yet declining WPI inflation trend has also been observed in the early months, indicating easy price pressure, mainly in the food and fuel segments.
Retail inflation began declining from November 2024 and remained within the Reserve Bank's 2% to 4% range until June 2025. It then fell below 2%. Food inflation, which accounts for approximately 48% of the CPI, began declining from around 6% in January and reached negative levels, i.e., below zero, in June. Food inflation was (-)3.91% in November.
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RBI Governor Sanjay Malhotra stated that headline inflation could remain close to the 4% target in the first half of the next fiscal year, 2026-27. Inflation, excluding precious metals, is expected to remain well below the target since early 2024. Good agricultural production, low food prices, and an exceptionally favorable outlook for global commodity prices indicate that retail inflation for the full year (2025-26) could remain around 2 percent, half the rate projected at the beginning of the year.
The RBI has already issued a consultation paper on inflation targeting. Meanwhile, the government is working on a new CPI series with a base year (2024=100). This will revise several parameters used in index compilation. This change, being made after more than a decade, aims to substantially improve the representativeness, accuracy, reliability, and overall quality of inflation data. The government is expected to release the new retail inflation series in February.
