Food inflation may increase in 2026, owing to a combination of climate disruption and energy and fertilizer supply shocks. In this context, it is pertinent to examine the role played by flexible inflation targeting (FIT) in controlling headline inflation, and the impact of food inflation in this regard.
Now as the re-evaluation of FIT draws near, we question if this change in weightage of the consumer price index (food basket down to 36.75 per cent) will solve the policy problem of inflation stickiness. We argue here that if food inflation was the cause of headline inflation stickiness, it is also the reason for RBI achieving inflation targets. The new numbers coming in January 2026 are indicative: food inflation is at 2.13 per cent and concomitantly the headline inflation is at 2.75 per cent.
Food inflation at the core
It was the food inflation surge which exacerbated interest rate policy calibration most of the times after adoption of FIT. Of course, one cannot empirically validate it without the counterfactuals. Yet, the question here is whether a lower food weightage in the CPI will significantly alter price movements and the policy response.
Figure 1 depicts the trends in CPI headline, food and two core inflation measures. The first core inflation is derived after excluding food, fuel, petrol and diesel and has a weight of 45 per cent. Given the recent volatility of gold and silver prices, a modified core is also presented: excluding gold and silver from the core, which has a 43.8 per cent weight. Note that, except during the period June 2022 to February 2023 coinciding with the post Covid 19 inflation outbreak everywhere, core inflation never breached the upper tolerance band of 6 per cent.
The correlation between food and headline inflation during January 2015 till November 2025 remains extraordinarily high at 0.91. Also, this is a sustained phenomenon — the rolling correlation (with a one-year window) shows almost a perfect collinearity between food and headline CPI inflation, irrespective of the behaviour of the core inflation (Figure 2).
Inflation volatility
Further, the volatility of food inflation mirrors the volatility of headline inflation. Figure 3 presents standard deviations of headline, food and core inflation estimated over a 12-month window.
Core inflation volatility is low and steady. Food and headline inflation volatility clearly feed each other (Figure 4). In contrast, the correlation between food inflation volatility and core inflation volatility remains low and is estimated to be negative for many months. This implies that food inflation volatility does not necessarily translate into core inflation volatility.
Thus, if the adoption of FIT failed to achieve the inflation target in the past, it was primarily due to high and volatile food inflation. At the same time, when inflation fell below 4 per cent, it came from the sharp deceleration of food prices alone. So far, there is no clear evidence that RBI has achieved its target with its ability to engender a drastic decline in core inflation. Prima facie, the FIT framework has had less influence on limiting food inflation and its volatility. Crucially, while the dominance of food gets reduced in the new CPI, this dynamic is here to stay.
The monetary policy implications are interesting. Real interest rates calculated by adjusting for headline numbers are higher than if adjusted for only core or modified core inflation. With food price volatility, real interest rates remained much higher than anticipated, though rate cuts of last year have aligned it downwards to an extent. FIT thus makes the MPC more conservative than necessitated by trend of real interest rates. The new CPI may not alter these patterns significantly.
Das is ICICI Bank Chair Professor, Indian Institute of Management Ahmedabad (IIMA), and Roy Trivedi is Associate Professor, National Institute of Bank Management (NIBM). Views are personal
Published on March 17, 2026
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