Your personal experience with price rise may not gel with the official reading as it depends on three main factors

It is not just RBI’s forecasters who are likely to be scratching their heads after the release of India’s latest retail inflation numbers for May 2017. Aam aadmi is quite bewildered too. The data shows that the inflation rate, measured by the Consumer Price Index (Combined — new series) was 2.2% for May 2017, slipping from a 3% reading for April which everyone thought was the rock-bottom. The food component of the index actually deflated by 1.1%.

A CPI inflation rate below 2.5% is a once-in-a-blue-moon occurrence in India. Looking back at the history of the CPI – Industrial Workers (the older avatar of the index which has a longer history), we find that India has registered CPI inflation of less than 2.5% only in 12 months in 20 years.

But if retail inflation is at a stand-still, how come most of us don’t feel it? Shouldn’t this be boosting our purchasing power and visibly fattening our wallets?

There are three reasons why your personal experience with price rise may not gel with the official reading.

Where you live

If you live in Jammu & Kashmir, Puducherry or Sikkim, the inflation rates in your household budget may bear no resemblance to the headline inflation number.

This is because the All-India CPI Combined is compiled by collecting town and village-level data on the prices of goods and services across States and then aggregating them.

Now, all States and Union Territories do not get equal weighting in the total. The weights are decided by the consumption expenditure within each State relative to the all-India consumption basket. While the State of Maharashtra gets a 13.2% weight in the all-India CPI (Combined), J&K weighs in with just 0.94%, Puducherry with 0.17% and Sikkim with 0.05%.

In effect, price trends at Maharashtra carry nearly 260 times the influence that Sikkim carries in deciding the final CPI number. Runaway inflation in India’s less populous low-spend States and Union Territories is unlikely to show up in the form of a big swing in the overall index. But even small blips in the States of Maharashtra (13.1% weight), UP (12.4%) and Tamil Nadu (7.3%) can swing the headline number.

This is why, in May 2017, CPI inflation at J&K (6.3%), Delhi (5.1%) and Himachal Pradesh (4.7%) ruled at many times the all-India reading of 2.2%.

Consumption basket

Does 45.8% of your monthly household budget go towards food and groceries? Would house rent makeup just 10.1%? Do you fritter away 2.4% on ‘tobacco and intoxicants’? If not, the inflation in your household is likely to be very different from the official inflation rate.

In order to arrive at a CPI General Index that is representative of both India and Bharat, the statistics office assigns different weights to the different products and services. These weights are derived from the actual spending patterns of rural and urban households as captured by the NSSO’s ground-level survey of expenditure patterns across India. The latest such survey was the 68th round conducted over 2011-12. (See graphic below).

Because the majority of Indian households belong to lower-income strata, the CPI General Index thus carries a far higher weight to products than services.

Services often witness higher price rise than products in the Indian context. But in practise, more affluent households will tend to spend a far lower proportion of their income on food and essentials and make a higher allocation to non-essentials and services.

One-offs

The official CPI print captures the point-to-point change in the index in the latest month, compared to the same month last year. This makes the number susceptible to distortions from one-off factors both in the base month and in the current one.

The CPI inflation rate for May 2017 has, for instance, been suppressed by the base effect. As we know, a bountiful monsoon this year has led to a bumper production of pulses, oilseeds and horticultural crops. This has triggered a rout in agri-commodities ranging from tur and urad dal to potatoes, onions and tomatoes, prompting farmers to protest. Agri-market watchers also add that the note ban and GST impact on the agri-supply chain have led to poor offtake and offloading of stock, thus adding to this downward spiral.

But a fall in retail food prices at this time of the year is quite a one-off situation. Every year, food prices usually soar in the months of April-May as they represent the pre-monsoon months when food crops are in short supply.

In May last year, for instance, two consecutive poor monsoon years had fuelled a sharp flare-up in the prices of pulses, oilseeds, vegetables and spices. In May 2016, therefore the item-wise breakdown of CPI showed the prices of pulses up 33% (year-on-year), vegetables higher by 10% and spices rising 9%.

But in May 2017, the respective CPI index for vegetables was down by 13%, that for pulses had plunged 15% and fruits and oils were up by just 1-2% compared to the same time last year.

If we ignore the monthly numbers and focus on three-year trends instead, we find that price levels have continued to creep up steadily. Between May 2014 and now, the CPI Combined has risen at an annual 4.5%.

Food prices in this span have climbed 4.1%. In the preceding three-year span from 2011 to 2014, the CPI Combined had soared 9.6% and the CPI Food Index 10.9%.

In short, yes, inflation has moderated of late, but for most middle class folk, it is likely to be higher than 2.2%. To get a real feel of your personal inflation rate, you should check out CPI trends in your State of residence, and in the products and services that make up the lion’s share of your budget.