On Calculating the Cost of Living Index in India

This note provides evidence on Indian budget data on the variation of the true cost of living index across expenditure classes, and on the sensitivity of the index to the demand functional form used. The results show the inegalitarian nature of price rise in a period of accelerating inflation that can have significant impact on inequality estimates. The study points to the need for publishing more disaggregated, expenditure-class specific cost of living indices and importance of continuing the search for a more plausible demand system for the Indian economy.