Business Original explainer
Why the same salary buys less each year, how India measures price rises, and what the RBI does about them.
Most Indians do not need an economist to tell them that prices have gone up. They feel it at the vegetable stall, at the petrol pump and in the monthly grocery bill. A kilo of onions that cost one amount last year costs more this year, and the same salary buys a little less than it used to. That slow shrinking of what money can buy has a name: inflation.
Inflation is not about one item becoming expensive. It is about the general level of prices rising over time. If only tomatoes become dear for a few weeks because rain damaged the crop, that is a price shock in one item. If food, transport, rent, medicines and school fees all creep up together, month after month, that is inflation. The difference matters, because a single expensive vegetable can be avoided or replaced, but a general rise touches almost every part of a household budget.
Think of inflation as the rupee losing a little of its strength each year. If prices rise by 6 per cent in a year, something that cost Rs 100 last year costs about Rs 106 this year. If your income rises faster than prices, you are better off. If prices rise faster than your income, you are worse off, even if the number in your bank account looks bigger.
India's main measure is the Consumer Price Index, or CPI. It tracks the prices of a fixed basket of goods and services that households typically buy, from rice and cooking oil to rent, medicines, transport and school fees. Field staff visit markets and villages every week to collect real prices, and the National Statistics Office, under the Ministry of Statistics and Programme Implementation, turns those prices into an index. Inflation is then the change in that index compared with the same month a year earlier.
The basket is updated from time to time so that it reflects how people actually spend. The current series uses 2024 as its base year, and its weights come from a household spending survey carried out in 2023-24. It covers 358 items, grouped into 12 divisions. Food and beverages remain the largest part, with a weight of about 36.75 out of 100, which is why a bad onion or tomato season can move the headline number so much. Prices are collected from 1,407 urban markets, including online markets, and 1,465 villages across the country.
There is also a separate food index, the Consumer Food Price Index, which looks only at food. That matters in India, because food takes up a bigger share of spending here than in many richer countries, especially for lower-income households. When food prices jump, the pain is felt quickly and widely. In October 2026, for example, overall CPI inflation was 6.09 per cent, up from 5.54 per cent in September, while food inflation was 8.94 per cent. Rural inflation, at 6.63 per cent, was higher than urban inflation, at 5.41 per cent.
Prices usually rise for a mix of reasons, not one single cause. The first is demand. When incomes rise and more people want the same goods, sellers can charge more. Festival seasons, a good harvest that puts money in rural hands, or a boom in jobs can all push demand up. The second is cost. If diesel becomes dearer, transporting vegetables costs more. If wages rise, or imported raw materials become expensive, businesses pass at least part of that cost to customers.
The third reason is supply. A poor monsoon, floods, or a disruption in imports can reduce how much of something is available. When supply falls and demand stays the same, prices rise. India has seen this often with onions, tomatoes and pulses, where a shortfall in one region can push prices up across the country within weeks. A fourth reason is expectations. If shopkeepers and workers expect prices to rise, they raise their own prices and wage demands in advance, and that expectation can become self-fulfilling.
Inflation does not hit everyone in the same way. Borrowers can gain, in a limited sense, because they repay loans in rupees that are worth a little less than when they borrowed them. Savers lose if the interest on a fixed deposit is lower than inflation, because their money buys less when they withdraw it. People with assets such as land or gold may see their value rise, while daily-wage workers and pensioners, whose income adjusts slowly or not at all, feel the squeeze first.
The Reserve Bank of India is tasked with keeping inflation under control. Its target is CPI inflation of 4 per cent, within a band of 2 to 6 per cent. That target was set in 2016 and renewed for April 2026 to March 2031. If average inflation stays outside the band for three quarters in a row, the RBI must explain to the government why it happened and what it will do about it. Its main tool is the repo rate, the rate at which it lends short-term money to banks. On 7 October 2026, its Monetary Policy Committee raised the repo rate by 25 basis points, to 5.50 per cent.
For most households, the lesson is simple. Do not judge your money only by the number in your salary or your savings account. Judge it by what that money can buy. When prices rise slowly and incomes keep pace, life stays manageable. When prices run ahead, every rupee has to work harder, and that is when inflation stops being a headline and starts being felt at home.
This explainer was written by The Daily Short's desk from the sources listed above. It is general information, not professional advice. Spot an error? See our Corrections Policy or tell us via the Contact page and we will correct it. Follow our official Instagram @thedaily.short.