Calculating inflation

With the quest begun, it was now a matter of trying to connect the dots. 

I read all about inflation from my daughter’s economics books, read many results that Google presented and ended up no wiser. The theory was simple enough. Something that used to cost X at a given time costs (x + I%*x) when inflation is ‘I‘. Find the base price at a given time and its current price and elementary math will give you the inflation. 

I hunted around and found a table of “somethings” that is used to calculate Consumer Price Index (CPI) in India. This table is constructed from a list of everything that people in the country spend on – food, housing, transport, clothing, education, fuel and lots more including even intoxicants. There are tables, organized by state to account for differences in consumption patterns. Data is collected from over 2300 urban and rural locations across the country. Every month. This makes it look pretty sound and a robust and defensible metric. But, I wondered, does it represent something real – something that I could relate to in my own expenses or is it like the proverbial data of the average person with 2.2 children who no one can ever meet?

Looking around at how other countries arrived at inflation did not yield much satisfaction. They all followed similar patterns with similar high level categories. With data collected at a similar periodicity.

This called for a deeper dive. Going beyond the categories to each individual item resulted in a list 300 items long, an eminently manageable list. Each item looked like we could find the price for it online, in real time, from a suitable e-commerce provider. Food was easy, clothing with a bit of stretch, things like fuel also were manageable, but education, housing and transportation were trickier. 

That started the challenge of finding a online source of price for each item in the list. Two thirds were relatively easy to manage and the rest required some calisthenics to reach. In this process of mapping the CPI index to online sources, a bigger question arose. The list of items were such that, in my opinion, there wouldn’t be a single family anywhere in India that would consume that specific basket of goods. If we did proceed with obtaining appropriate prices for all the CPI components, would it still reflect actual inflation observed by any single person anywhere? Would it relate to anything that I can experience?

The answers to both these questions clearly showed that a changed approach is needed. A more personalized one. What’s needed was a personalized Price Index.

This should show, in very concrete terms, that I will actually be paying X% more (or less) than the previous month for my needs. It should be a measure of an impact on my wallet that I can correlate directly with this index. It should be as close as I (or anyone) can get to having inflation index that you can almost touch and feel. Something true. Something Real.

The Real Price Index.