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Home > India > Business > Special

How to calculate your inflation

Arnav Pandya in Mumbai | April 14, 2008

Rising prices take a heavy toll on the finances of families. And, while the declared rate of inflation may sound nominal (7.4 per cent), the real impact is different on individuals. So, it is important to get an idea of how inflation has impacted you in reality.

Of course, sitting with pen and paper to do this exercise yourself  may not give you an exact figure, but it will definitely help to pin down items that have increased drastically and are hurting your budget. 

Regular Expenses

Start with a list of the regular monthly expenses. These would include vegetables, fruits, milk, food items and other items, which make the consumption part of the household budget.

Then, there are regular expenses such as, newspapers, electricity, telephone bills, daily conveyance and salaries of maids and drivers.

Also, for a family with small children, there will be additional expenses on stationery, books, toys and other material that have to be bought at regular intervals. 

There are other expenditures on eating out and entertainment activities. All these numbers, taken together, represent your monthly expenses.

Once you have a fix on these numbers, keep on monitoring them every month, or at least, quarterly. Accordingly, you will get an idea of the expenses you should cut down, if required. 

Annual expenses

Every year, there would be certain expenses that would be a part of your regular outflow. In many cases, people forget to include these items in their calculations, but it's important to remember that they constitute a very important part of budgeting.

For instance, the tuition fees paid to the school or college or private teachers might be paid once or twice a year. However, if the cost of education is rising constantly, it also becomes a part of your inflation.

This annual number will vary from family to family, depending on their standard of living. For instance, a student who is going for a management degree at the Indian Institute of Management-Ahmedabad (IIM-A) will find that his tuition fees has shot up by 300 per cent. Other expenses that may vary include books, school and uniform.

Then, there are various festivals, where there would be purchases such as clothes and gold. Yes, it is a bit difficult to budget for them completely, but depending on your previous year's experiences, you will be able to put some numbers to them.

A point to note is that you will need to break the yearly expenses to expenses per month. Only then you will arrive at the actual expenditure per month. Now with these two sets of numbers, you can start doing the calculations.   

Actual calculation

Now that there is an expense list, you can create a made-for-you index. While the Wholesale Price Index (WPI) gives weights to all the different kinds of items to come to a consolidated figure, you need to simply track the month-wise rise in prices.

However, though it's the simplest way, there could be some anomaly in it because in some months there is a tendency that prices might shoot up for some time.

For instance, during the months of April and May, you might see the electricity bill shooting up because of an extra levy in force. This might give the impression that the charges have increased. But in June, when this figure falls, it balances out the sudden rise.

A better way would be to compare year-on-year, so that the seasonal imbalances are wiped out. The change in the expense, overall, will give the real rate of inflation that is impacting your household.

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