Which world does RBI live in?

Why the Cost of Living Keeps Rising Even as CPI Hits Record Lows**

India today presents an economic paradox. Headline inflation, as measured by the Consumer Price Index (CPI), is at multi-year lows. The Reserve Bank of India (RBI) cites this as evidence of macroeconomic stability and policy success. Yet for most households, especially the urban middle class, the cost of living has never felt higher. Healthcare bills, school fees, rent, and daily services continue to rise relentlessly.

This disconnect raises a fundamental question: does CPI reflect the economy people actually live in?

What CPI Measures — and What It Misses

CPI tracks changes in retail prices of a fixed basket of goods and services. In India, this basket is heavily weighted towards food, which accounts for nearly half the index. As a result, when food prices remain stable—due to good monsoons, government procurement, or imports—headline inflation falls sharply.

However, over the past two decades, household spending patterns have changed dramatically. Families now spend a growing share of their income on:

Private healthcare and diagnostics

School fees, coaching, and higher education

Urban housing, rentals, and EMIs

Transport, childcare, insurance, and digital services

These categories carry relatively low weights in CPI. Housing inflation, for instance, is measured largely through rent, while property prices, EMIs, and land costs are excluded. Healthcare costs are captured narrowly, despite rising out-of-pocket expenses for advanced treatments.

The result is predictable: CPI shows price stability even as household budgets come under strain.

Prices vs Financial Stress

Another limitation of CPI is that it measures average price changes, not financial stress. A medical emergency or a child’s higher education does not occur every month, but when it does, it can erase years of savings. CPI smooths out these episodic but devastating expenses.

In effect, CPI answers the question: Are prices rising on average?

Households ask a different question: Can we still afford the life we are expected to live?

Structural Changes CPI Hasn’t Kept Up With

India’s economy has shifted decisively from public to private provisioning of essential services. Where families once relied on government hospitals and schools, they now depend on market-priced private alternatives. At the same time, private equity investment and corporate consolidation in sectors like healthcare and education have increased commercial orientation and pricing power.

Yet CPI weights adjust slowly and backwardly. They struggle to capture the real-time transformation of household consumption, especially in urban India.

The Policy Blind Spot

The RBI relies on CPI for inflation targeting and interest rate decisions. From a macroeconomic standpoint, this makes sense. But low CPI inflation can coexist with high “felt inflation”, leading to:

Public dissatisfaction despite stable prices

Wage pressures disconnected from official inflation data

Misalignment between monetary policy and household experience

In short, CPI reflects the economy RBI manages, not fully the economy households inhabit.

Suggestive Measures: Rethinking How We Measure Inflation

1. Introduce a Cost of Living Index (COLI)

The RBI would do well to publish a Cost of Living Index alongside CPI. Unlike CPI, a COLI should focus on the expenditure burden faced by households, giving higher weight to healthcare, education, housing, transport, and insurance.

2. Classify the Index by City Tiers

A single national average hides sharp regional disparities. The COLI should be published separately for:

Tier-1 cities: High housing costs, private healthcare dominance, premium education

Tier-2 cities: Rapid cost escalation with growing urbanisation

Tier-3 towns and semi-urban areas: Lower absolute costs but greater income vulnerability

This would allow for more nuanced policy interpretation and communication.

3. Use COLI as a Complement, Not a Replacement

CPI should continue to guide monetary policy. COLI can serve as a diagnostic tool—informing wage negotiations, urban policy, social spending, and public understanding of inflation.

Conclusion

India may be winning the battle against headline inflation, but it is losing credibility with households who feel economically squeezed. In a service-driven economy, measuring inflation without adequately measuring the cost of living risks mistaking statistical comfort for social well-being.

A Cost of Living Index, disaggregated by geography, would not weaken the RBI’s policy framework. It would strengthen it—by grounding macroeconomic decisions in lived economic reality.

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