Previous Year Question

Headline Inflation in India is measured on the basis of the Consumer Price Index – Combined (CPI-C). It represents changes in the overall price level of a specified Basket of goods and services purchased by consumers in rural and urban areas.

The Consumer Price Index – Combined (CPI-Combined) includes both the Consumer Price Index for Rural Areas (CPI-Rural) and the Consumer Price Index for Urban Areas (CPI-Urban). Their combination uses Weights based on Household Consumption Expenditure, providing a combined assessment of price changes across rural and urban areas.

Calculation of Headline Inflation:

Here, CPIₜ represents the index for the current month, while CPIₜ₋₁₂

represents the index for the corresponding month of the previous year. Thus, the Year-on-Year change in prices is generally calculated.

Headline Inflation includes price changes in food items, fuel, and other consumer goods and services. In contrast, the analysis of Core Inflation generally excludes volatile prices related to food and fuel to examine relatively persistent price trends.

Differences among the other given price indices:

• Wholesale Price Index (WPI): Measures price changes in goods at the wholesale level. It does not include services.

• Consumer Price Index for Industrial Workers (CPI-IW): Represents price changes associated with the consumption expenditure of industrial worker households.

• Consumer Price Index – Urban (CPI-Urban): Measures price changes for consumers in urban areas only.

Previously, WPI was used as the principal inflation indicator in India. In 2014, the Urjit Patel Committee recommended adopting CPI-Combined-based inflation for monetary policy. After the Flexible Inflation Targeting Framework received statutory backing in 2016, CPI-Combined became the basis of India's inflation-targeting framework.