🧮 How CPI Inflation Is Calculated — And Why Your Costs Can Rise Even When CPI Is Low

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✅ 1. What Is CPI (Consumer Price Index)?

CPI measures the average price change of a fixed “basket” of goods and services consumed by households.

This basket contains:

  • Food & beverages

  • Housing

  • Fuel & light

  • Transport

  • Clothing

  • Health, education, etc.

Each category has a weight based on how much the average Indian household spends.

Example (approx. India CPI weights):

  • Food & Beverages – 45%

  • Housing – 10%

  • Fuel & Light – 7%

  • Transport & Communication – 8%

  • Clothing & Footwear – 6%

  • Misc Services – 25%

So CPI = weighted average of all these price changes.

📌 2. How CPI Inflation Is Calculated

Step 1 – Fix a base year price

Example (Base Year 2012 = 100 index)

Step 2 – Track price changes for each item every month

Step 3 – Multiply each item’s price change with its weight

Step 4 – Add all weighted changes = CPI value

**Step 5 – Inflation = %

change of CPI from last year**

Inflation=CPIcurrent−CPIlast yearCPIlast year×100\text{Inflation} = \frac{\text{CPI}_{\text{current}} - \text{CPI}_{\text{last year}}}{\text{CPI}_{\text{last year}}} \times 100

CPI is not the price of one item.
It is the average of 300+ items.

🛑 3. Why Do You Feel Prices Are High Even When CPI Is Low?

This is the confusion many people have.
Here are the real reasons 👇

Reason 1: CPI is an average — your personal consumption is different

You buy:

  • More milk

  • More vegetables

  • More petrol

But in CPI:

  • Milk = just one item

  • Fuel has only 7% weight

  • Transport has 8% weight

  • Housing is 10% even if your rent did not increase

So even if milk rises 20% or petrol rises 10%,
their effect on CPI is limited because of low weights.

Reason 2: Some categories may be falling while few are rising

Example:

  • Milk ↑

  • Vegetables ↓

  • Edible oil ↓

  • Mobile data ↓

  • Clothing stable

  • Housing stable

CPI = net effect.
If some items fall and some rise → inflation becomes low.

Reason 3: CPI uses year-on-year comparison

Your milk may be more expensive compared to 2021 or 2022.
But CPI only compares vs last year.

So CPI may show:

  • Inflation low
    …but your cost is high because price increased over 3–4 years.

Reason 4: Petrol price may be high, but weight in CPI is small

People think petrol price = inflation.
But in CPI:

  • Fuel & light = 7%

  • Transport = 8%

Petrol alone has a very small direct weight.

Even if petrol rises 20% → CPI impact may be only 1–2%.

Reason 5: Government subsidies, tax cuts, seasonal prices affect CPI

Sometimes wheat, rice, LPG, or vegetables get government support.
This keeps CPI low even though branded products, restaurant food, school fees, etc. go up.

📌 4. Why CPI Says “Inflation Is Low”, But You Feel “Cost of Living Is High”?

Because CPI ≠ Cost of Living for one person.

CPI = cost of an AVERAGE household
Your life expenses ≠ average household.

Examples:

  • If you eat more dairy → dairy inflation hits you more

  • If you travel more → petrol hurts more

  • If you live in metro → rent inflation hurts more

  • If you buy premium brands → CPI doesn’t capture it properly

This is called personal inflation vs headline inflation.

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