Inflation: The Silent Expense You Can’t Ignore

When people talk about inflation, the usual explanation is simple:

“Inflation reduces the purchasing power of money. Tomorrow, you will need more money to buy the same thing you bought today.”

This age-old truth has stood the test of time and will remain relevant for the future. But beyond the simple definition lies a complex measurement system, a few hidden flaws, and a reality check on what inflation actually means for your financial life.

In this article, we will break down how inflation is calculated, why the official numbers may not always reflect your reality, and how you should look at inflation while planning your future.

How Inflation is Calculated

To gauge inflation, economists and policymakers rely on government-reported data. In India, the two common metrics are:

1. Consumer Price Index (CPI) – Tracks the price changes of a basket of goods and services consumed by households. The RBI uses CPI for policy decisions.
2. Wholesale Price Index (WPI) – Focuses on price changes at the wholesale level.

For our discussion, let’s stick to CPI, since it directly impacts consumers and is the benchmark for monetary policy.

The CPI uses 2012 as its base year (100). Over time, as prices rise, the index climbs higher. In July 2025, the CPI stood at 196.0, compared to 193.0 in July 2024, showing an inflation rate of 1.55%.

At first glance, this looks like a small, even comforting, rise. But numbers can be deceptive.

The Base Effect: Why Inflation Feels Different

Inflation is always measured year-on-year. The July 2025 figure of 1.55% came from comparing prices to July 2024. Here’s the catch: last year’s prices heavily influence today’s inflation reading.

• If inflation was high in the previous year, today’s rate appears lower.
• If inflation was low last year, today’s rate appears higher.

This phenomenon is called the base effect. While technically correct, it doesn’t always reflect your present reality—because what really matters to you is current prices and their impact on your spending power.

The Problem with One “National Basket”

Another challenge is the composition of the CPI basket. Nearly half of it is food-related items. That makes sense for families at or just above subsistence level, where food consumes a large part of income.

But what about households with higher earnings? Their budgets may focus more on:

• Education
• Healthcare
• Housing
• Lifestyle and discretionary spending

This raises an important issue: India has 144 crore people, each with a unique consumption pattern, but only one inflation basket.

That means the “official” inflation rate may be very different from your personal inflation rate.

Measuring Your Inflation

So, how do you make sense of inflation in your own life?

Theoretically, you could create a custom basket of your expenses and track price changes over time. But practically, this is difficult to do consistently. A simpler and more effective approach is:

👉 Tie inflation to your financial goals.

• Child’s education abroad – Education costs have been rising much faster than the official CPI.
• Home or car purchase – Real estate and auto prices have their own inflation curve.
• Daily expenses – Food, transport, lifestyle costs may track closer to CPI.

By thinking goal-wise, you get a clearer picture of the inflation you actually face.

Looking Beyond One Year: The Long-Term View

One way to avoid the distortion caused by the base effect is to look at inflation over a longer period.

For example, government data shows:

• CPI in June 2025: 194.2
• CPI in June 2020: 151.8
• CPI in June 2015: 123.6

This translates to:

• 5-year CAGR inflation: ~5.05%
• 10-year CAGR inflation: ~4.6%

That’s a far more realistic reflection of what inflation feels like over time.

The Role of Professional Guidance

Even if you’re financially savvy, inflation planning can be tricky. A financial planner can help you estimate inflation rates for different goals and ensure your financial plan isn’t caught off guard.

Here’s a simple framework you can use with your adviser:

• X% of your expenses → Food & essentials
• Y% → Education & skill-building
• Z% → Lifestyle & discretionary

With this, you can arrive at a more personalised inflation assumption for your financial plan—whether you’re projecting for 5, 10, or 20 years ahead.

Final Thoughts

Inflation is not under your control. It’s a silent force that chips away at your money’s value, year after year. But instead of fretting over it, you can plan smartly:

• Recognise that the official CPI may not reflect your personal inflation.
• Anchor inflation assumptions to your financial goals.
• Look at longer time horizons to avoid misleading short-term base effects.
• Work with a financial planner to build resilience into your plan.

At the end of the day, inflation is just one cog in your financial planning wheel. With the right strategy, it doesn’t have to derail your future.

Key Takeaway: Inflation is personal. Don’t plan with generic numbers—plan with your reality.