Why services inflation matters and is much higher than official figures..

The Indian Government and central bank have been patting their back over lower inflation in last few years. The financial markets too joined in the celebration as all they care for is reported inflation. No credit is given to the positive oil shock which just pushed inflation lower not needing any policy really.

But what about people who would laugh off such pats. Infact there are some concerns that inflation has again started rising. It was reported as 5.77% in June 2016, the highest in 22 months (the previous month number was 5.76% which was reported as 21 month high!). For most of us commoners, even this figure is much lower. The average inflation is 10-15% easily across most things we buy. I mean the disconnect between official figures and actual ones is amazingly wide. There is always talk of overestimating GDP but little on underestimating inflation.

Part of the problem is poor coverage of service inflation in our price index. Rajalakshmi Nirmal has a piece on services inflation which has been zipping at the rate of 10-15% for most services and even higher for others:

The buzz around inflation usually centres around the soaring prices of veggies and dals but the heat is much greater from another quarter — services. Galloping costs of services such as healthcare, education and housing are hurting the Indian middle-class much more and finding a solution to this problem appears difficult. While the Centre is making some attempt to tame food inflation, little is being done to control services inflation, which now looks like a structural issue with the country’s changing demographics and capacity constraints.

In June, even as the overall CPI surged to a 22-month high of 5.7 per cent, the increase in the cost of many services was much higher. Inflation in cost of hospital and nursing home charges as captured by CPI stood at 8.26 per cent in June, up from 6.8 per cent last year. Similarly, housing cost, i.e., rental expenses, surged to 5.48 per cent, up from 4.49 per cent in the same period last year. The cost of repairs of residential buildings is also growing faster at 6.76 per cent, versus 5.57 per cent in 2015.

But the official numbers do not capture the entire, slightly worrying picture. In healthcare, for instance, the cost inflation is in double digits of 12-15 per cent which has, in recent years, pushed up the premium rates of health insurance policies sharply. In education, again, for professional courses at top institutes, the fee is rising at least at 10-12 per cent each year as captured by various surveys we have highlighted below.

One reason for the understated services inflation number could be that MOSPI gives more weight to public services that come at a subsidised cost, say economists. However, one thing that stands clear now is that when you plan for your retirement or your child’s education, you have to factor in higher services inflation. Else you might be left with a shortfall in your kitty.

Whatever the planning. there will always be a hole.

Only is we measure things correctly and honestly, can we figure the action to address the issue.

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