diff --git a/doc/whats-new.rst b/doc/whats-new.rst
index a8302715317..d92f3239f60 100644
--- a/doc/whats-new.rst
+++ b/doc/whats-new.rst
@@ -42,6 +42,8 @@ Deprecations
 Bug fixes
 ~~~~~~~~~
 
+- Fix dtype inference for ``pd.CategoricalIndex`` when categories are backed by a ``pd.ExtensionDtype`` (:pull:`8481`)
+
 
 Documentation
 ~~~~~~~~~~~~~
diff --git a/xarray/core/utils.py b/xarray/core/utils.py
index ad86b2c7fec..9ba4a43f6d9 100644
--- a/xarray/core/utils.py
+++ b/xarray/core/utils.py
@@ -114,6 +114,8 @@ def get_valid_numpy_dtype(array: np.ndarray | pd.Index):
     elif hasattr(array, "categories"):
         # category isn't a real numpy dtype
         dtype = array.categories.dtype
+        if not is_valid_numpy_dtype(dtype):
+            dtype = np.dtype("O")
     elif not is_valid_numpy_dtype(array.dtype):
         dtype = np.dtype("O")
     else:
diff --git a/xarray/tests/test_dataset.py b/xarray/tests/test_dataset.py
index ff7703a1cf5..a53d81e36af 100644
--- a/xarray/tests/test_dataset.py
+++ b/xarray/tests/test_dataset.py
@@ -4697,6 +4697,17 @@ def test_from_dataframe_categorical(self) -> None:
         assert len(ds["i1"]) == 2
         assert len(ds["i2"]) == 2
 
+    def test_from_dataframe_categorical_string_categories(self) -> None:
+        cat = pd.CategoricalIndex(
+            pd.Categorical.from_codes(
+                np.array([1, 1, 0, 2]),
+                categories=pd.Index(["foo", "bar", "baz"], dtype="string"),
+            )
+        )
+        ser = pd.Series(1, index=cat)
+        ds = ser.to_xarray()
+        assert ds.coords.dtypes["index"] == np.dtype("O")
+
     @requires_sparse
     def test_from_dataframe_sparse(self) -> None:
         import sparse