India’s CPI Overhaul: Smoother Prints, Deeper Scrutiny

India’s January 2026 inflation reading was notable less for its level than for what lay beneath it. Headline consumer price inflation rose to 2.75% yr/yr, comfortably within the Reserve Bank of India’s 2–6% tolerance band, but the figure marks the debut of a fundamentally redesigned Consumer Price Index. The new series, rebased to 2024=100 from the previous 2012 base, reflects a decisive statistical reset. For policymakers, investors and corporate planners, this is not merely a technical update. It reshapes how inflation will behave, how volatile it will appear, and which components will drive it.

A new basket for a different economy

The revision draws on the latest Household Consumption Expenditure Survey and expands the basket to 358 items, up from 299. The changes are emblematic of India’s structural transition. Rural house rents are now explicitly captured. Digital-era expenditures such as streaming services and online subscriptions have been included. Fitness services, processed dairy products and other lifestyle-oriented spending categories have also gained prominence in the basket.  At the same time, relics of an earlier consumption pattern such as VCRs and other obsolete electronics have been removed.

More consequential than the item list is the reweighting. Food and beverages, long the dominant and most volatile component of India’s inflation basket, now carry a smaller share. In their place, housing, transport, communication and a broader range of services account for a larger proportion. The index has also migrated to the international COICOP 2018 classification, expanding from six to twelve divisions, aligning India more closely with global statistical practice.

The effect is structural: future inflation readings are likely to display less headline volatility driven by monsoon swings or vegetable price spikes, and greater sensitivity to services and discretionary urban consumption.

What drove January’s reading?

The January print itself reflects three interacting forces. First, base effects. Comparisons with unusually subdued readings in late 2025 mechanically lifted the year-on-year number. Second, food inflation turned modestly positive after earlier softness. While the reduced food weight dampens its influence relative to the past, seasonal price movements in vegetables and cereals still contributed to the uptick. Third, and increasingly relevant under the new framework, non-food components exerted upward pressure. Precious metals, particularly gold and silver jewellery, saw sharp price increases. With better representation in the revised basket, such categories now exert a clearer impact on the aggregate index. Certain personal care and discretionary services segments also registered firmer readings.

Notably, rural and urban inflation were broadly aligned at around 2.7–2.8%, underscoring the narrowing divergence between the two economies in price terms.

A smoother headline, a subtler signal

For the Monetary Policy Committee, the headline figure poses no immediate alarm. At 2.75%, inflation sits below the 4% target midpoint, providing room for a neutral to mildly accommodative stance if growth considerations warrant it. Yet the signal extraction problem has become more nuanced. With food’s share reduced, headline inflation will increasingly resemble core dynamics. Services inflation (rents, health, education, transport) will carry more weight in shaping the trajectory. These are categories that tend to be stickier and more closely linked to income growth and demand conditions than to supply shocks. In effect, India’s CPI will behave more like that of advanced economies: less prone to abrupt spikes, but potentially more persistent once pressures build.

For corporates, the recalibration has practical consequences. Inflation-linked contracts, wage negotiations, dearness allowances and indexed bonds will now reference a basket that better reflects middle-class urban consumption patterns. Pricing strategies in services, housing and discretionary segments will assume greater macro relevance. For investors, the shift reduces the probability of dramatic headline swings triggered by a poor harvest. But it raises the premium on tracking labour markets, urban rental inflation and service-sector pricing power.

Outlook

Looking ahead through 2026, the inflation environment appears benign. Global commodity prices have moderated, domestic food supply conditions remain stable, and external pressures are contained. Under the new weights, these conditions should translate into relatively subdued headline prints. The risk, however, lies in services. If urban demand strengthens, supported by infrastructure spending, income gains or credit expansion,  service inflation could harden. With a higher structural weight in the basket, such pressures would be harder to offset.

In that sense, January’s release signals a transition rather than a turning point. India has not entered a new inflationary cycle. But it has entered a new inflation measurement regime, one that will likely deliver calmer monthly numbers, while demanding closer scrutiny of the underlying drivers.