New CPI Series to Smooth Inflation Swings, Keeping 2026 Price Pressures Largely in Check

India’s inflation outlook into 2026 is expected to remain contained, with the upcoming CPI series with a 2024 base year likely to reduce volatility between food and headline inflation. BofA Global Research expects muted cost pressures and stable core inflation to keep price risks manageable, even as near-term readings edge higher under the new index weights.

BofA expects wholesale price inflation to remain contained in the near term, supported by low global commodity prices, persistent disinflation in China, and limited pass-through from a weak rupee to input costs to date. The RBI’s industrial outlook survey reinforces this view, pointing to easing pressures from raw materials and salary costs in October-December. With wholesale prices muted, the transmission to retail inflation is expected to remain weak, thereby keeping headline CPI in check.

That said, the comfort may not be permanent. Input cost pressures are expected to re-emerge in January-March and April-June, increasing the likelihood of manufacturers will pass on higher costs. BofA’s assessment is that any imbalance created by this shift will show up in retail inflation with a lag rather than abruptly, thereby preventing sharp spikes in CPI readings.

Core inflation is expected to move broadly sideways through 2026. In the near term, pressures from elevated gold prices, a weaker currency and some recovery in demand may push core inflation higher. Beyond the first half of 2026, however, BofA expects a gradual decline, with core inflation settling close to 4% by the end of 2026-27.

On an annual basis, core CPI is projected to average 4.4% in 2025-26, up from 3.5% in the previous fiscal year, and rise up further to 4.6% in 2026-27. This modest rise largely reflects elevated precious metal prices and anticipated GST-related reversals, particularly tobacco duty hikes. Crucially, BofA notes that the surge in gold and silver prices is masking broader disinflation across most core components. Excluding precious metals, core inflation is running closer to 3% year-to-date, signalling subdued underlying demand and price pressures consistent with a low-inflation environment that could persist longer.

BofA identifies four factors that should keep core inflation broadly stable and prevent a sustained move above 5%. First, demand-side pressures remain limited, with manageable input costs and moderate growth in core GDP, while the impact of earlier GST changes continues to work through the system. Second, the absence of significant rupee-driven spillovers and continued Chinese deflation help anchor tradable prices. Third, while gold prices have risen sharply, base effects are likely to cap their contribution to core inflation over time. Finally, tobacco duty hikes are expected to add to both headline and core inflation, but this influence is likely to be discrete rather than broad-based.

New CPI series
Beyond cyclical drivers, the upcoming CPI series with 2024 as base could materially change how inflation behaves and is interpreted. Based on extrapolations using the Household Consumption Expenditure Survey 2023–24, BofA estimates that food and beverages could see their weight fall from about 46% in the current index to around 39.5%. Within food, weights for cereals, pulses and vegetables decline meaningfully, while processed food, meat and dairy rise modestly. Core CPI weight, by contrast, increases from roughly 47% to over 55%, reflecting higher shares for services and housing.

One of the most significant implications of this reweighting is lower volatility. With reduced emphasis on perishable food items and relatively stable fuel components, both food and headline inflation are likely to show smoother movements. BofA’s analysis over five- and ten-year horizons suggests a meaningful reduction in volatility under the new weights, improving the signal quality for monetary policy.

Importantly, the new CPI series may not materially alter India’s long-run inflation profile. Ten-year and five-year average headline inflation remains broadly unchanged at around 4.8% and 5.0%, respectively, while core inflation averages about 4.9% over both horizons. This suggests continuity in the underlying inflation regime despite changes in composition.

The near term, however, looks different. Using current price data mapped onto prospective 2024 weights, BofA finds the one-year average inflation could be closer to 3.0%, compared with about 2.5% under the current series. The difference largely reflects higher estimated food inflation—around 50 basis points higher—nudging headline inflation up modestly.

Overall, the outlook suggests an inflation environment in 2026 that is more stable and easier to interpret. While short-term averages may look higher under the new CPI series, the reduced food-driven noise should allow the RBI to focus more squarely on underlying demand and core trends. For monetary policy, that could mean fewer false signals from transient food shocks—and a clearer framework for balancing growth and inflation as India moves through the next cycle.