A disconnect between data and daily life: India's inflation puzzle

By Hemantkumar Shah*

In recent news, the government has announced that the inflation rate has reached a six-and-a-half-year low. According to the Ministry of Statistics and Programme Implementation, the Consumer Price Index (CPI)-based inflation for June stood at just 2.1 percent, down from 2.82 percent in May. This is the lowest rate in 77 months, and the ministry even claims that food prices have fallen by 1.06 percent compared to last year. While these numbers sound impressive, a crucial question arises: Does the average person's experience align with these official figures?

Inflation, in simple terms, is the rate at which prices rise. A decrease in the inflation rate doesn’t mean that prices are going down; it simply means they are rising at a slower pace. The government's data suggests a significant slowdown, with rural inflation dropping from 2.59 percent to 1.72 percent and urban inflation from 3.12 percent to 2.56 percent. This highlights a different reality for those living in villages versus cities, as their experience with price changes can vary.

The Reserve Bank of India (RBI) also plays a part in this narrative. The RBI's monetary policy aims to keep inflation within a target range of 2 to 6 percent. To this end, it has recently cut the repo rate, citing the falling inflation figures provided by the government. It's important to remember that the RBI relies on the government's data to make these decisions, as it does not calculate the inflation rate itself. However, our own experience often shows that the effects of these policy changes take a long time to trickle down to the market.

The CPI is calculated by tracking price changes for a basket of 299 goods and 40 services. It's the measure that determines the dearness allowance for industrial workers and government employees. Similarly, the Wholesale Price Index (WPI) is calculated by the Ministry of Commerce and covers 697 items. The WPI data shows a modest decrease of 0.13 percent in wholesale prices for June, the first drop in 20 months. While economists suggest that a decrease in wholesale prices should eventually lead to a drop in retail prices, the current numbers present a paradox: wholesale prices are down, yet consumer prices have risen by over 2 percent.

The disconnect between official statistics and daily life is perhaps most evident when we look at food prices. The government's report states that food prices in June fell for the first time since February 2019, with vegetables down 19 percent and pulses down 11.8 percent from last year. However, cereal prices, which include staples like wheat, rice, millet, and corn, have risen by 3.7 percent, a faster pace than the overall inflation rate.

This disparity matters most to those for whom food constitutes a large portion of their monthly budget. A survey by the Ministry of Statistics and Programme Implementation from 2023-24 shows that food accounts for 40 percent of household spending in cities and 47 percent in villages. For a poor family, a 3.7 percent rise in the price of grains has a much more significant impact than a minor drop in the overall inflation rate.

Ultimately, while the official numbers may paint a rosy picture, they don't capture the full reality. The indices used to measure inflation, no matter how sophisticated, have limitations. They don't include every item a consumer buys, and they fail to reflect the lived experience of millions of people who are disproportionately affected by rising food costs. The dearness allowance, which is based on these same figures, often doesn't increase enough to match the actual rise in prices, further eroding the purchasing power of many. And for those who don’t receive a dearness allowance at all, the situation is even more dire. The gap between government statistics and the daily struggle of the consumer is, therefore, not just a matter of numbers, but a matter of real economic hardship.

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*Senior economist based in Ahmedabad

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