What the Inflation Rate Doesn’t Tell You About Everyday Struggles

The Fugues Fail to Capture How Rising Prices Hit Poorer Households the Hardest

June 13, 2025

The official inflation rate is released every month and is used by policymakers and the media as an indicator of whether life is becoming more expensive for citizens. But a paper by the World Inequality Lab shows that this average number hides big gaps in how rising prices affect people at different income levels, especially the poor.

The working paper, titled “Measuring Inflation Inequality in India,” suggests that inflation, as it is officially measured, does not reflect the economic reality of all Indians. In fact, it argues that poorer households face significantly higher inflation than richer households during periods of crisis.

Between 2015 and 2024, when food prices or other essentials spiked due to supply shocks like the COVID-19 pandemic or the Russia-Ukraine war, poorer families were hit harder. In 2024, for instance, the poorest 5% of Indian households faced an inflation rate of 6.4%, compared to just 4.7% for the richest 5%. This difference may seem small, but for families living on tight budgets, even a slight increase in prices can mean choosing between food and medicine, or skipping meals entirely.

One reason for this unequal experience is the way poorer and richer households spend their money. Households with lower incomes tend to spend most of their earnings on essential goods—mainly food. The poorest Indians, according to the study, spend more than half their monthly budget on food, compared to less than a third for the richest. And food prices, unlike many other items, tend to be highly volatile. Prices of vegetables, pulses, edible oils and other daily-use items can rise sharply with changes in weather, transport disruptions, or shifts in global supply chains. When that happens, it’s the poorer households who feel the pinch first and most acutely.

Now, the Consumer Price Index (CPI), on which the official inflation rate depends, measures how the average prices of a set list of goods and services change over time. This list—or “basket”—is based on what an average household bought and spent on over a decade ago, using data from a government survey conducted in 2011–12. But both consumption patterns and spending priorities have changed since then, so the CPI no longer reflects how Indians actually live and spend today.

For example, the share of cereals, which were a stable and subsidised item a decade ago through the Public Distribution System (PDS), has dropped, while spending on more volatile and less supported items like eggs, fruits and oils has gone up. Yet the CPI basket has not been updated to reflect these changes, making it less and less accurate for capturing current price pressures, especially for the poor.

The study further shows that inflation for the poor is also more unpredictable. Price volatility, which is the amount by which prices swing from one month to the next, is much worse for those at the bottom of the consumption ladder.

Between 2015 and 2024, the volatility in food inflation for the poorest 5% of Indian households was nearly double that for the richest 5%. Unlike the rich, who can postpone certain purchases or rely on savings, the poor often do not have that flexibility. They must continue buying essentials no matter the price. And many rely on debt to do so.

The study draws on the All-India Debt and Investment Survey, 2019, to show how widespread household debt has become, especially for covering basic needs. In rural India, 35 percent of households were in debt. Among these, 37.9 percent of the outstanding institutional loans and 61.1 percent of the non-institutional loans were taken for consumption purposes such as food, education, medical treatment and housing.

The pattern is even more striking in urban India. While 22.4 percent of urban households were in debt, 83.1 percent of the institutional loans and 76 percent of the non-institutional loans were used to meet similar consumption needs.

Another finding in the paper relates to the structure of the CPI itself.

The authors argue that the index has a built-in pro-rich bias. This happens because the CPI gives more weight to items commonly consumed by higher-income households—such as services, housing and non-food goods—whose prices tend to be more stable. Meanwhile, items that make up a large part of poorer households’ budgets, such as vegetables and pulses, are more prone to price spikes but receive less weight in the official index.

As a result, when inflation rises, the CPI may not fully capture how much worse things have become for those with fewer resources.

The difference in inflation rates across income groups becomes even more important when policies are based on the official figure. Wages, pensions, and social benefits are often adjusted in line with the CPI. If the CPI underestimates the inflation faced by the poor, then these adjustments will fall short of what is needed to maintain a basic standard of living. This failure compounds over time, gradually widening the gap between rich and poor. In this way, what begins as a technical issue in measurement becomes a question of fairness.

There are some protections in place, such as the PDS, which offers subsidised cereals to the poor. The paper acknowledges that this system does cushion the impact of inflation on some essential items like rice and wheat. But outside of this narrow protection, the poor remain fully exposed to price rises in everything else. For items like pulses, edible oils, and vegetables, where there is no such buffer, the poor have faced a disproportionately higher inflation burden year after year. 

The paper makes it clear that the hardship felt by the poor during inflationary periods is not simply a result of market forces but also of policy choices and statistical design. In failing to account for the uneven impact of inflation, India’s official metrics miss the reality experienced by a large section of its population.

Addressing this problem would require strong interventions, like more regular updates to the CPI basket, greater transparency in price data collection and expanded social protection measures, especially during times of food price volatility.

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