The government just changed the way inflation is calculated and I believe everyone should know about it.
Inflation is measured using the Consumer Price Index (CPI), a weighted average of what households spend on. It is basically a basket of goods and services that represents typical household consumption patterns.
The more we spend on something, the more its price change should influence inflation. But for years, Indiaโs CPI reflected spending habits from 2012 which was completely a different economy.
๐ช๐ต๐ ๐๐ต๐ฒ ๐ผ๐น๐ฑ ๐๐ฃ๐ ๐ฏ๐ฒ๐ด๐ฎ๐ป ๐๐ผ ๐ณ๐ฒ๐ฒ๐น ๐ผ๐๐๐ฑ๐ฎ๐๐ฒ๐ฑ?
- Consumption patterns evolved
1) Food took a smaller share of budgets and food inflation cooled
2) Spending shifted to rent, healthcare, education & services
3) Streaming, mobile data, digital tools became essentials
4) Rent, school fees & healthcare rose steadily
Inflation wasnโt wrong, it just didnโt fully reflect modern spending reality.
๐ช๐ต๐ฎ๐ ๐ต๐ฎ๐ ๐ฐ๐ต๐ฎ๐ป๐ด๐ฒ๐ฑ ๐ถ๐ป ๐๐ต๐ถ๐ ๐ป๐ฒ๐ ๐๐ฒ๐ฟ๐ถ๐ฒ๐?
- India introduced a new CPI series with 2024 as the base year, built using the Household Consumption Expenditure Survey (2023โ24).
Why base year matters so much
- It defines what normal spending looks like
- Inflation is measured relative to this benchmark
๐ช๐ต๐ฎ๐โ๐ ๐ป๐ฒ๐ ๐ถ๐ป ๐๐ต๐ฒ ๐๐ฃ๐ ๐ฏ๐ฎ๐๐ธ๐ฒ๐?
1) Items removed - VCRs, DVD players, cassettes, Tape recorders, second-hand clothing
2) Items added
- Streaming services & digital storage
- Rural housing expenses
- Value-added dairy products
- Babysitters & modern household services
Total items in this basket have increased from 299 to 358
๐ช๐ต๐ ๐๐ต๐ถ๐ ๐บ๐ฎ๐๐๐ฒ๐ฟ๐ ๐๐ผ ๐บ๐๐ฐ๐ต?
- Food price spikes may not swing inflation as sharply
- Slow, steady increases in rent, education & healthcare will matter more
- Inflation may feel less volatile but more relatable
- Price tracking system will include digital price collection tools and online retail prices and give a much more accurate picture
๐ง๐ต๐ฒ ๐๐ฝ๐ฝ๐น๐ฒ๐-๐๐ผ-๐ข๐ฟ๐ฎ๐ป๐ด๐ฒ๐ ๐ฃ๐ฟ๐ผ๐ฏ๐น๐ฒ๐บ
- One concern analysts highlight is comparability between the old and new CPI series.
- Under the previous CPI, December inflation was 1.33%. January inflation under the new series is 2.75%. Comparing these numbers directly can be misleading because:
1) Some goods have been added and others removed
2) Category weightages have been rebalanced
3) Data sources and price collection methods have been modernised
No inflation measure can match every householdโs experience. But by updating the base year, refreshing the basket and modernising data collection, Indiaโs CPI now reflects todayโs cost of living.