Is your inflation really 7.65%? Demystifying the new CPI

Now, here comes the real inflation number - the one that affects you as a consumer.

The January Consumer Price Index for both rural and urban consumers has come in at 7.65 percent, the first time we have had real year-on-year change number since the new CPI was introduced in January 2011.

The CPI is 1 percent higher than the Wholesale Prices Index which came in at 6.6 percent for January. It also shows that rural inflation is lower than urban inflation, with the urban CPI at 8.25 percent and the rural one at 7.38 percent.

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If you still don’t find the number believable, since you are paying through your nose for various essentials, here’s the explanation.

Your inflation depends on your spending pattern. The CPI is a basket decided by bureaucrats who just want a benchmark to guide policy.

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For example, this is how the combined CPI (rural plus urban) is weighted: Food, beverages and tobacco 49.71 percent; Fuel and light 9.49 percent, Clothing, bedding and footwear 4.73 percent, Housing 9.77 percent, and Miscellaneous (education, medicine, transport etc) 26.31 percent. That’s 100 percent in all (For full details on the new CPI and the weights, click here).

So if you are a Mumbaikar spending 40 percent of your salary paying rent, obviously the CPI does not cover your rate of inflation. Your inflation is worse.

If you are an aspiring model who spends a quarter of her salary on clothing, fashion footwear, and make-up, obviously the 4.73 percent weightage given to “clothing, bedding and footwear” is going to understate your rate of inflation.

The bottomline is this: each person needs his own CPI measure since spending patterns are unique to each individual or household.

However, the CPI’s real job is not to tell you what you already know - how expensive the stuff you buy is. Rather, it is supposed to tell us how inflation is impacting average households (though there is no such animal called an ‘average household’) and its broad trajectory.

So what does this CPI number tell us?

Actually, it hides more than it tells. Here’s why.

Since half the weightage is for food, it is in a sense telling us where we are compared to last year’s food prices. And the reason why the CPI is at 7.65 percent (and not higher) is that food inflation is lower this year at 4.11 percent.

And why, you may ask, is food inflation so low when my apples cost a fortune and milk prices are rising. Even veggies have come off their winter lows.

The answer is: the big fall is in heavily weighted items like cereals (2.69 percent inflation with a weight of nearly 30 percent among food items), pulses (5.66 percent) and vegetables (-24.83 percent). What this tells us is that pulses and veggies were very expensive last year - and so their fall this year is exaggerated.

But look at other key food products, and they are all in double-digits: oils and fats (13.47 percent), eggs, fish and milk (10.45 percent), milk and products (16.53 percent), condiments and spices (11.83 percent), fruits (10.62 percent), et al.

Next, look at fuel and light. The inflation rate here is 13.13 percent and this is surely likely to shoot up once the UP elections are safely out of the way and petrol, diesel and cooking gas prices are hiked to rein in the fiscal deficit. The 9.49 percent weight given to fuel and light is going to be a big booster for inflation in the coming months.

As for housing - with house prices sky high, rental increases are par for the course - it is surely going to pep up your urban CPI. While the weightage for housing is 9.77 percent, in the urban part of the index the weightage is 22.53 percent - nearly a quarter of the overall weight. The coming months are unlikely to be easy on rental and other housing costs.

As for the miscellaneous category, it includes items like education, medical care, transport, household requisites, recreation, and personal care and effects. At 26.31 percent, this is the highest weighted segment after food. Any bets we won’t be seeing significant price pressures here?

The CPI’s real test will start from March or April, when all the price adjustments are made in fuel and other prices.

Till then, keep your fingers crossed.