Why inflation is rising in India
India's retail inflation has been trending upward, driven mainly by food price pressures and higher fuel costs rather than a surge in consumer demand
Food inflation has been pushed up largely by supply-side shocks, particularly a weak or erratic monsoon affecting crop output
Rising crude oil prices have raised transportation and production costs, feeding through into higher prices for manufactured goods
The pattern points to a cost-push rather than demand-pull inflation episode, with implications for how monetary policy should respond
Consumer Price Index (CPI) — Compilation and the 2024 Base Year Revision
The CPI is India's principal retail inflation gauge, compiled monthly by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI). It captures the change in prices of a fixed basket of goods and services consumed by households. The CPI series was recently revised to a 2024 base year (from the earlier 2012 base), using weights derived from the Household Consumption Expenditure Survey (HCES) 2023-24.
Key Details
- New CPI series base year: 2024=100, released using HCES 2023-24 consumption weights
- The weight of food and beverages in the basket fell from about 45.9% (2012 series) to about 36.8% (2024 series), while housing's weight rose
- Basket coverage expanded from 299 items (2012 series) to 358 items (2024 series), spanning 1,465 rural and 1,395 urban markets
- CPI (Combined) is the index targeted by the RBI for monetary policy, distinct from the Wholesale Price Index (WPI), which measures prices at the wholesale/producer level and excludes services
Because food and beverages still carry the single largest weight in the CPI basket even after the revision, monsoon-driven food price shocks continue to be the dominant swing factor in headline inflation readings.
Cost-Push vs Demand-Pull Inflation
Inflation is analytically split into demand-pull (aggregate demand outstripping supply, often linked to expansionary fiscal/monetary policy) and cost-push (rising input costs — wages, fuel, raw materials — pushing up prices independent of demand). The current episode is characterized as cost-push, driven by supply shocks (poor monsoon reducing food output) and imported cost pressures (crude oil).
Key Details
- Cost-push inflation is harder for monetary policy (interest rate changes) to address because it does not stem from excess demand
- Supply shocks to food (monsoon failure, crop damage) are described in NITI Aayog and RBI literature as "transient" shocks that core inflation targeting is designed to look through, versus persistent demand-side inflation
- Core inflation (CPI excluding food and fuel) is tracked separately by RBI to distinguish persistent inflation from volatile food/fuel components
The article attributes the inflation surge explicitly to supply shocks (monsoon) and cost pressures (oil), not to excess demand — the textbook definition of a cost-push inflation episode.
RBI's Flexible Inflation Targeting (FIT) Framework
Since 2016, India has followed a statutory Flexible Inflation Targeting framework under Section 45ZA of the RBI Act, 1934 (inserted by the Finance Act, 2016). The framework was based on the recommendations of the Urjit Patel Committee (2014). Under it, the Central Government, in consultation with the RBI, sets a CPI inflation target once every five years; a six-member Monetary Policy Committee (MPC), chaired by the RBI Governor, sets the policy repo rate to meet this target.
Key Details
- Inflation target: 4% CPI inflation, with a tolerance band of +/-2% (i.e., 2%-6%), first fixed for 2016-2021, retained for 2021-2026, and retained again for 2026-2031
- "Failure" of the target is defined as CPI inflation remaining outside the 2%-6% band for three consecutive quarters, requiring the RBI to report to the Government explaining the failure and remedial steps
- MPC composition: three RBI members (including the Governor) and three external members appointed by the Government
- Fuel price pass-through: since 2010 (petrol) and 2014 (diesel), retail fuel prices in India are market-determined by oil marketing companies rather than government-administered, so global crude price movements transmit relatively quickly into domestic pump prices
Because food/fuel-led inflation is a supply-side phenomenon, the RBI's Monetary Policy Committee faces a policy dilemma — raising rates to control headline inflation would do little to fix monsoon-driven food shortages or global oil prices, while doing nothing risks inflation breaching the upper tolerance band.
- RBI's statutory CPI inflation target: 4%, tolerance band 2%-6% (Section 45ZA, RBI Act 1934, target retained for 2026-2031)
- CPI base year revised from 2012 to 2024, based on HCES 2023-24 weights
- Food and beverages weight in CPI basket: down from ~45.9% to ~36.8% under the 2024 series
- CPI basket expanded from 299 to 358 items under the 2024 series
- MSP-notified crops, fuel pricing since 2010/2014, and monsoon performance are the three recurring supply-side levers behind India's food and fuel inflation cycles